Wednesday, 29 April 2015

Biotechnology Stock Value Swings

In a July 6, 2013 post, this blog discussed the upswing in biotechnology patenting and the rising numbers of biotechnology IPOs.  The blog also mentioned promising R&D and an increase in FDA approvals as a potential cause of the IPOs.  Fast forward to recent months and there is a substantial amount of chatter about a bubble in biotechnology stocks (here, here and here).  In late March, biotechnology stocks took a dive, rebounded soon thereafter and now look like they are headed for another dive.  So, why the swings in value?  On the positive side, there is promising R&D, FDA approvals and pharmaceutical companies with lots of funds to acquire biotechnology companies.  The negative side is described by a recent article by Gregory Zuckerman in the Wall Street Journal titled, Biotech’s Rally Fuels Bubble Fears:

Biotech shares in the Nasdaq now trade at almost 50 times their earnings over the past year, compared with a price/earnings ratio of 27.5 for the overall Nasdaq Composite. Nasdaq biotech shares trade at 31.5 times their expected earnings over the next 12 months, above the 21 ratio for the overall Nasdaq market, according to FactSet Inc.

Just like Inc., eBay Inc. and some other technology companies were growing companies with shares trading at sky-high valuations in 2000, some worry that today’s highflying biotech shares also are strong companies trading at prices that are too high. Celgene currently trades at a p/e ratio of 51.1. Biogen, Amgen and Gilead are at 36.6, 24.8 and 13.8, respectively.

I suspect that there are also two other reasons to worry about the value of biotechnology companies.  First, the FDA is moving toward approval of generics—biosimilars—for biologics, here.  Indeed, in March of 2015, the FDA approved the first biosimilar, Sandoz’s Zarxio, which is the biosimilar for Amgen’s Neupogen, a cancer treatment.  Second, there is growing discontent with the pricing of some drugs, particularly the amazing drug Solvaldi for Hepatitis C.  Notably, Gilead Sciences has moved to make its drug available at a lower cost in some countries such as India.  What do you think? 

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