Photo by Bloomberg—Getty Images
By Laura Lorenzetti
August 11, 2014

From innovative Ebola treatments to diabetes apps, biotechnology companies are making headlines in the media and in the market.

Biotech company valuations have soared this year: The Standard & Poor’s biotechnology index has boomed 13.6% since January compared to a 5.1% gain in the benchmark S&P 500 index. Initial public offerings have followed suit as drug makers look to cash-in on surging investor interest: 53 biotech and pharmaceutical companies announced public offerings this year. That’s a jump of 175% and 43% year over year, respectively, according to Bloomberg data.

These high valuations have even prompted Federal Reserve chairman to say she’s worried. Janet Yellen recently noted that valuations in the sector appear “substantially stretched.”

But, savvy investors are looking beyond these soaring valuations: It’s all about the data these days.

“If you are a sophisticated biotech investor, a lot of these guys, the Wellingtons, T. Rowes, Fidelitys — these guys are incredibly sophisticated,” said Asher Rubin, partner and co-head of the Life Sciences Industry team at Hogan Lovells, a global law firm. “They know what they’re looking at overall.”

Some investors may be jumping on the biotech bandwagon because of the great returns. But many are more conscientious with their investment strategies, especially when it comes to companies working on experimental therapies that may or may not be approved. Biotech stocks are notoriously volatile investments.

Much of the recent fervor for biotech companies is a result of better data coming out of drug makers, not simple gut instinct. Companies have more sophisticated data today on developing drugs than in years past, and that is a huge attraction for knowledgeable investors looking for drug pipelines that could be worth billions.

Take Kite Pharmaceuticals (KITE), for example. The company went public in June raising $146.6 million, well more than its initial target of $115 million. Since it’s June 20 debut, Kite’s share value has gained almost 24%.

The swelling interest stems from Kite’s unique immune-targeting cancer therapy, called CAR-T. This drug works by triggering the body’s immune system to identify and attack the cancer tumors directly.

CAR-T development has been ongoing since the early 1990s, so why all the excitement from investors now?

The answer is data. Kite isn’t the only biotech developing these therapies; Novartis and Juno Therapeutics are also working on developing drugs, and when combined the data from all three companies build a strong case for the success of these drugs. It’s the cross-referencing of successful CAR-T results, which each drug maker is testing individually, that makes each firm more valuable, said Rubin. It shows that the treatment is working and has real potential to get to market.

Investors are doing this cross-comparison with most biotech companies to assess the value of their drugs in development, and that’s contributing to the recent growth in biotech company valuations.

“You’re finally seeing really good data out of these companies,” said Rubin. “I think there’s more opportunity to do better investing right now.”

Still, most of these recently-public biotech companies, including Kite, don’t make any money. The companies are risky bets — and many are going to need to raise additional funds over the rest of the year to continue R&D.

The funding inertia has had an equal and opposite effect on biotech mergers. More early-stage companies are opting to go public instead of seeking out a bigger buyer, such as a Novartis (NVS) or a Pfizer (PFE). However, as more data gets out and these innovative drugs move closer to approval, the M&A market for these firms will start to come back.

“As these smaller companies progress, they will strike licensing and collaboration deals,” said Rubin. “We’ll probably see big pharma reap the rewards of what the small biotechs have been doing.”

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