Biotechnology stocks will be no one-day wonder

It has become something of a cliche to warn of the perils of biotechnology stocks and there are, no doubt, dangers for some. The fabulous returns being enjoyed by early investors in these garden-shed enterprises could biodegrade as swiftly as they have arisen. Investors at today's dizzy heights are certainly playing a high-risk game. Just the slightest of setbacks for one of the prospective wonder drugs and the whole edifice of hope could come tumbling down. But, contrary to what many people think, this is not a potentially calamitous investment bubble in the making.

There is no denying that the numbers have become frighteningly large and the valuations apparently ludicrous for companies that have never made a profit and as likely as not never will. British Biotech alone is now worth almost as much as Railtrack. But it is not correct to depict biotech as another gold rush, awash with naive small investors prepared to mortgage themselves to the hilt in the vain hope of striking it rich.

Most biotech investors are cash-rich institutions. Those piling into the sector's 12 publicly quoted enterprises over the last six months have predominantly been sophisticated institutional investors, financially robust enough to withstand the losses should all turn to sand and presumably mature enough to know the risks. Most of these investors are playing a very long game. Although some of the companies and certainly many of their products will fall by the wayside, it may only require one hit to be seriously in the money. Indeed the problem with stock market wonder stocks is not that there are too many, but that there are not nearly enough of them.

In the United States, the biotechnology sector is better developed and the capital markets more receptive and responsive to its need. In Britain there is still suspicion and scepticism. It seems to be a long-forgotten fact that part of the function of stock markets is to raise money for promising businesses. The rules were deliberately changed a number of years ago to allow the biotechs, companies without track records, to raise money and have their shares traded on the Stock Exchange. This is undoubtedly a good thing. The volatility of these stocks alone is hardly reason for cracking down. Biotech may represent the unregulated Wild West frontier of investment. But many investors like it that way and if it helps in the creation of a new Glaxo, who's complaining?