After a sell-off in December, investors are starting to pour back into the biotech sector this month at rapid levels. At close of business on Thursday, the Nasdaq biotech index (Nasdaq: IBB) was up 5.81% for the month, while the S&P 500 was crawling back to break even at 0.21%.
Even though the biotech sector has experienced double-digit gains over the past four years, investors are continuing to double down due to higher growth opportunities over the rest of the market.
A significant driving factor for the growth is the current innovation wave being experienced in this sector.
Gartner, a technology research firm, has an excellent model for explaining the maturation of technology and its effect on industry called the “Technology Hype Cycle,” as shown in the chart below.
You’ve probably seen this before, but it’s an excellent reminder for gauging the impact of new technology on a market and how long this impact will last. This is crucial in biotech due to the rapid peaks and valleys in stock prices based upon drug approvals and treatment technologies.
Here’s a quick refresher on how the cycle works…
New technologies usually break into the market due to a major need or requirement that has driven them there. Although quite innovative, the Technology Readiness Level (TRL) or effectiveness/maturity of the technology is usually quite low when first entering the market.
Excitement or hype for the technology grows rapidly as people learn about it and start to brainstorm on how disruptive it will be to the industry. As you can imagine, this sudden and immediate hype drives up share price.
After widespread hype, the technology will go through a so-called “trough of disillusionment” after knowledge of the technology is widely known, but before it can be widely implemented due to maturity reasons. This trough is where most innovations die when they can’t be effectively or economically integrated with existing capabilities.
In biotech, this can also be equated to early drug trial phases.
During the “slope of enlightenment” phase innovation is engineered by industry for integration with the broader market by providing a reliable, effective and economical capability. After this is achieved, full production occurs ending in the “plateau of productivity.”
A great example of this is electric cars.
Before Tesla motors, a couple of the big manufacturers attempted electric car manufacturing on a small scale in response to rising gas prices. The fuel-free vehicles were a great concept, however battery capabilities in the mid-90s only allowed for limited range and power. Tesla motors broke these engineering barriers and pushed the 100% electric car into the mainstream.
For the past several months, we’ve been profiling billionaire Dr. Patrick Soon-Shiong and his cutting-edge cancer-fighting conglomerate NantWorks. What makes Dr. Soon-Shiong’s approach so successful is that he is methodically building his conglomerate’s capabilities by purchasing and merging with companies that all have very high technology readiness levels (well past the trough).
The formula for their success has been taking the most advanced and tested technologies in augmented intelligence, supercomputing, and high-speed networks, from industries traditionally outside of biotech and merging it with cutting-edge patient diagnosis and treatment systems from the health care industry.
By integrating together proven technology, NantWorks minimizes time spent in the dead spots of the hype cycle, bringing technology to market at unseen before pace.
To put things in perspective, we’re now seeing technology grow at a pace that is the equivalent of the American industrial revolution.
Before I go any further, let me make something clear. I’m not saying Dr. Soon-Shiong is the next John D. Rockefeller, J.P. Morgan or Andrew Carnegie but he is utilizing the same methodology to consolidate and control technology that these captains of industry utilized to build their empires.
Since NantWorks is a privately held conglomerate, investors have been hungry for an opportunity to associate themselves with this movement. One publicly traded company that presently has multiple partnerships with NantWorks is Sorrento Therapeutics (Nasdaq: SRNE).
Earlier this week, I sent an alert out through my trading service Biotech Intel Trader to purchase Sorrento at a true value price on Tuesday. At close of business on Thursday, just three days later, we’re currently looking at a near 10% return.
As always, I’ll continue to monitor the market’s social media collective intelligence and keep you updated on the latest trends. If you’d like a closer look at my service, you can do so here.