With Updates Today  2/13/14   XBI at $157.8

Biotechnology Bubblet- How High Can These Stocks Run?

We reviewed mid-cap biopharmaceutical valuation in early October as part of our overall market model for a sector that defies classical analysis. Two emerging growth stocks in our model focused in oncology have soared to the $10B market cap level which corresponds to the acquisition price of Onyx Pharmaceuticals by Amgen (AMGN).

Two market mavens have compared the current biotech “bubblet” to 1999 so we will see if the turn comes  in 2014.

How Do We Value Biotechnology Stocks? | Raygent.com

The rally today brought both Pharmacyclics (PCYC $139.85) and Incyte (INCY $69.13) near all time 2014  highs  and market capitalizations. This relates to one component of our valuation model which is based on the acquisition  of Onyx at the $10B level. Pharmacyclics received FDA approval for ibrutinib for CLL .  Incyte reported 2013 results and pipeline updates which was received positively driving stock up 5%. Using current 2014 product sales for guidance at $335M Incyte is valued at 33x product sales giving its pipeline a valuation of compared to Onyx. Pharmacyclics (PCYC) with 2014 Revenues  forecasted at $329M has  valuation of 31X product sales. Onyx was valued at 17.5X sales when acquired by Amgen (AMGN) but also had 9 products in its pipeline. So pipeline valuations of INCY and PCYC is in the $5B+ range using a simple comparison of 17.5X sales.  Pipeline valuations are extremely difficult to do because of all the assumptions involved : product approval dates, 7 year sales forecasts, labeling etc.

Here is a different take on biotech valuation metrics.We all know that PEs don’t matter so look at 2024 peak sales to get today’s value?

Pharmacyclics (PCYC) has been on our focus list since 6/8/12 at a price of $38. Other Rayno movers today are : Achillion (ACHN $3.67) and Seattle Genetics (SGEN $51.33) 

Valuations of biotech stocks depend on more than just M&A but at least this is one benchmark. Currently we are in a momentum driven bull market where institutional and even retail investor demand drives stocks. That is why technicals are very imporatant. If we are looking for a correction or even a bear market we would more likely see it with smaller cap speculative stocks, such as GALE, with less mature pipelines and no revenues. See the Dream Team Web site to see how stocks are promoted. Can this be harbinger of an overextended bull?

Stay tuned as our model evolves.


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