Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Are These Billion-Dollar Biotechs Overvalued?

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Biotechs with market caps of a billion dollars or more are a dime a dozen. Well, actually, they're more like $12 billion or more a dozen, but you get the point. There are plenty of them. However, most biotechs boasting these high market caps actually have products on the market.

That's not the case for Pharmacyclics (UNKNOWN: PCYC.DL  ) and Sarepta Therapeutics (NASDAQ: SRPT  ) , though. Neither biotech has an approved product yet. Pharmacyclics boasts a market cap of $5.8 billion, while Sarepta's market cap stands near $1 billion.

Are these two biotechs overvalued -- or could their prices actually be attractive? Let's take a look.

Not enough to count
Pharmacyclics and Sarepta do generate revenue despite having no marketed product, by the way. Pharmacyclics brought in $160 million last year, thanks primarily to its partnership with Johnson & Johnson's (NYSE: JNJ  ) Janssen division. J&J is taking a lead role for non-U.S. commercialization of Pharmacyclics' lead product, ibrutinib, but will also participate in marketing the drug inside the U.S.

Sarepta, meanwhile, generated $37 million in 2012 revenue. Nearly all of those dollars stemmed from contracts with the U.S. government related to research of treatments for treatments of the Marburg and Ebola viruses.

Millions of dollars shouldn't be dismissed when many biotechs generate no revenue. However, neither Pharmacyclics nor Sarepta sport 10-digit market caps because of these revenue figures.

Paying for potential
Investors have driven these biotech's market caps to higher levels solely based on the companies' potential. For Pharmacyclics, that potential is powered by Bruton's Tyrosine Kinase, or BTK, inhibitor ibrutinib. Two late-stage studies are under way focusing on ibrutinib as a treatment for chronic lymphocytic leukemia and mantle cell lymphoma.

Projections for peak annual sales of ibrutinib vary from $4 billion on the low end to as much as $8 billion. The higher estimates assume that the drug will also prove successful in treating multiple myeloma and diffuse large B-cell lymphoma. Early- and mid-stage studies are under way for both of these indications.

If we take the lower-end figure, Pharmacyclics' market cap currently equals less than 1.5 times peak annual sales. How does Sarepta compare?

Sarepta's lead product, eteplirsen, has demonstrated impressive results in a mid-stage clinical study targeting treatment of Duchenne muscular dystrophy. Estimates for peak sales of the drug range from $600 million to $1 billion.

In this case, I'm inclined to use the upper range of peak sales projections because the more conservative estimates only address the U.S. market. Using the higher figure, Sarepta's current market cap basically equals annual peak sales.

Stacking up
Are 1.5 times and one times peak annual sales too pricey? Not if we look at other biotechs.

For example, Alexion Pharmaceuticals (NASDAQ: ALXN  ) boasts a market cap of nearly $17.7 billion. The company markets orphan drug Soliris. Alexion's 2012 sales came in at $1.13 billion. Analysts think that peak annual sales for Soliris should be at least $3.5 billion. Some think that figure could reach as high as $8 billion.

Using the more conservative estimate, Alexion's current valuation equals around five times peak annual sales for Soliris. That measure is well higher than the peak sales multiple for Pharmacyclics or Sarepta.

Vertex Pharmaceuticals (NASDAQ: VRTX  ) is another biotech with only a couple of drugs currently on the market: Incivek and Kalydeco. Initial peak sales for Incivek were estimated at around $2.9 billion, but those levels seem unlikely to be reached with sales already falling in the face of competition.

RBC Capital estimates that Vertex's portfolio of drugs for cystic fibrosis, including Kalydeco, could reach $3 billion in peak annual sales. If we add in estimated peak sales of $1.5 billion for other drugs that Vertex has in development, that gives us an optimistic total of $7.4 billion.

The market cap for Vertex now stands at $18.3 billion. This level equates to nearly 2.5 times peak annual sales for the company's drugs using very optimistic projections. That multiple could easily double if we used more realistic estimates for Incivek. Pharmacyclics and Sarepta again look attractive by comparison.

The future carries much more weight than the past in valuing any stock, but especially biotechs. In light of the numbers, I don't think these billion-dollar biotechs are overvalued at all. In fact, I think they're both still undervalued considering their potential.

Since Pharmacyclics and Sarepta have yet to receive approval for their lead drugs, we do need to consider the possibility that bumps along the road could occur. However, both companies seem to have the odds in their favor at this point.

While you can certainly make huge gains in biotech and pharmaceuticals, the best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2380400, ~/Articles/ArticleHandler.aspx, 9/28/2016 8:24:15 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,339.24 110.94 0.61%
S&P 500 2,171.37 11.44 0.53%
NASD 5,318.55 12.84 0.24%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/31/1969 7:00 PM
PCYC.DL $0.00 Down +0.00 +0.00%
SRPT $62.24 Up +3.14 +5.31%
Sarepta Therapeuti… CAPS Rating: **
ALXN $123.76 Down -2.22 -1.76%
Alexion Pharmaceut… CAPS Rating: ****
JNJ $119.39 Up +0.17 +0.14%
Johnson and Johnso… CAPS Rating: *****
VRTX $88.84 Down -0.28 -0.31%
Vertex Pharmaceuti… CAPS Rating: ****