The stock market is forward looking, which means that valuations aren't based on what a company did, but what it's going to do.
In biotech, that means companies can have some serious market caps despite having no drugs on the market if investors have confidence that they'll be raking in the cash soon enough.
||Market Cap (in billions)
||Enterprise Value (in billions)
|Pharmacyclics (Nasdaq: PCYC )
|Medivation (Nasdaq: MDVN )
|ARIAD Pharmaceuticals (Nasdaq: ARIA )
Source: S&P Capital IQ. Enterprise value based on cash and debt at the end of last quarter.
A big name likes this one
Not only does Pharmacyclics not have any drugs on the market, the company started its phase 3 program so recently, that it hasn't even had time to update the pipeline page on its website. It'll be awhile before the biotech is bringing in revenue.
Investors seem to be hooked on Pharmacyclics' cancer drug, ibrutinib, in part because of its partnership with Johnson & Johnson (NYSE: JNJ ) , which paid $150 million upfront, with the potential for another $825 million in development and regulatory milestone payment for rights to half of the drug. The biotech has already received $100 million of those milestone payments this month after two phase 3 trials were initiated.
Ibrutinib looks like it has potential, and Pharmacyclics has other drugs in its pipeline, but $4.6 billion is an awful lot to pay for a biotech that's years away from a marketed drug.
Big market, with competition
Medivation just received FDA approval for its prostate cancer drug Xtandi today, three months ahead of the decision date goal the FDA set of Nov. 22.
Xtandi will be used as a treatment after chemotherapy, but the big market is in first-line therapy. The drug is in a phase 3 trial in the pre-chemo setting, which has already completed enrollment, and now it's just a waiting game.
Unfortunately, while the pre-chemo setting is more lucrative, it's also more crowded. In addition to chemotherapy, there's Dendreon's (Nasdaq: DNDN ) Provenge, and Johnson & Johnson has applied to expand Zyriga into that setting.
The quick route to sales
The FDA is already reviewing ARIAD's ponatinib for treating patients with two different kinds of leukemia that have failed or can't take other treatments. The biotech is seeking an accelerated approval based on phase 2 data, which looked good enough to meet the hurdle for the unmet need. ARIAD expects to complete that application this quarter, which would likely put an approval in the first quarter of 2013.
That's great, and it'll bring in some revenue, but where ponatinib needs to excel is in newly diagnosed patients. The drug is in a phase 3 trial comparing it directly to Novartis' Gleevec. If it can show an effect there, investors will be rewarded with high enough sales to justify its current price tag.
A bad sign?
It doesn't seem that way. I wrote an article with the same title two years ago. All three top dogs at the time beat the AMEX Biotech Index since then.
VRTX data by YCharts
Will history repeat itself with the newest members of the club? Only time will tell. I certainly wouldn't fault anyone from avoiding Pharmacyclics, Medivation, and ARIAD at this point. There are plenty of expectations already baked into the share price, and one slip up will cause a major fall.
B esides, finding the next "biggest little biotech" is likely to be more profitable than buying the current crop. Since I wrote that last article two years ago, Pharmacyclics is up 1,000%, a solid 10 bagger.
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