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 Amazon.com 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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