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An Open Letter To Janet Yellen: Is There A Biotech Bubble?

This article is more than 9 years old.

Mark Schoenebaum, the lead health care analyst at International Strategy & Investment Group, sent the following open letter to his clients this morning, in response to comments by Fed chair Janet Yellen that have left both the iShares Nasdaq Biotechnology Index and bellwethers like Celgene, Gilead, and Biogen Idec all down 5% for the week.

I think it's worth reprinting -- I've added the headers and changed some punctuation.

The Honorable Janet Yellen, Ph.D.

Board of Governors of the Federal Reserve System

Constitution Ave NW, Washington, DC 20551

 

Dear Dr. Yellen:

Thank you for sharing your thoughts recently on the biotech sector. Given your stature, I paid very close attention to your comments, as did most biotech observers.

You stated that biotechnology valuations are "stretched, with ratios of prices to forward earnings remaining high relative to historical norms."

I just gathered biotech price to earnings ratios back to 1993 using Russell 1000 data, and my data show that the current ratio is roughly in-line with the historical median and is approximately 80% below the peak.

Please tell me what I'm missing, Dr. Yellen.

Respectfully,

Mark Schoenebaum

Senior Managing Director

Head of Healthcare Research

International Strategy And Investing Group

A note: Schoenebaum cautions that this chart doesn't mean biotechs are cheap, but it is an argument against this being a biotech bubble, and against the specific statements made by Dr. Yellen.

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