Biotech stocks have had a good run lately driving a handful of names to nosebleed valuations. Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX), Ionis Pharmaceuticals Inc. (NASDAQ:IONS), and Tesaro Inc. (NASDAQ: TSRO) are recording sales, but their stock prices, as a multiple of sales, are so high that cautious investors are justifiably nervous.
Commercial-stage biotechs tend to trade at mid-single digit multiples of their annual sales figures, but all three of these stocks are in the double-digits right now. Before you even consider buying or selling any of them, you had better understand why investors are paying such a hefty premium.
1. Ionis Pharmaceuticals: Ready for another great year
Everything's coming together for this pioneer of RNA-antisense technology. Its first commercial stage product, Spinraza, just finished a record-breaking rookie season. Plus, the FDA has already started reviewing applications for two new drug candidates with nine-figure sales potential.
At the end of 2016, Spinraza became the first FDA approved treatment for patients with spinal muscular atrophy, the most common genetic cause of infant mortality. Pent-up demand helped Ionis' marketing partner, Biogen (NASDAQ:BIIB) record a stunning $884 million in global Spinraza sales last year.
Ionis' share of 2017 Spinraza sales came in at $113 million. With Biogen's global salesforce doing the heavy lifting, Ionis has been directing plenty of that high margin revenue toward drug candidates it owns outright. A huge internal pipeline and the prospect of high-margin royalty revenue, from multiple sources, to fund their development are why investors don't mind paying about 13 times trailing sales for this biotech stock.
Earlier this year the FDA accepted an application for inotersen, a candidate intended to treat transthyretin (TTR) amyloidosis. Alnylam Pharmaceuticals (NASDAQ:ALNY) has a TTR drug of its own, called patisiran under review as well. The Agency is expected to announce approval decisions for Alnylam's patisiran and Ionis' inotersen this August. Despite competition that could be fierce, inotersen could eventually add around $300 million to Ionis' total annual revenue.
2. Vertex Pharmaceuticals: Sewn-up niche
Cystic fibrosis (CF) limits lung function and shortens lifespans of around 75,000 people in North America, Europe, and Australia, but Vertex is the only company marketing therapies that attack the root cause to help them breathe easier. This is just part of the reason investors are willing to pay about 17 times trailing sales for Vertex stock right now. The other part has to do with the company's rapidly expanding list of potential customers.
Vertex began the year marketing two CF therapies that had around 34,000 eligible patients. The recent approval of a third CF therapy, called Symdeko, could help expand the franchise's addressable patient pool to 44,000 this year, and a couple experimental therapies in late-stage testing right now could boost the figure to 68,000 within a couple years.
If the CF patient population seems too small to justify this stock's premium, consider Symdeko's wholesale acquisition cost of $292,000 for a year of treatment that patients will probably require throughout their lives. Without a serious contender on the horizon, Vertex profits could explode in the years ahead.
3. Tesaro Inc.: Falling behind
Investors are willing to pay around 13 times trailing sales for shares of this cancer drug developer in hopes that Zejula's ongoing commercial launch will pick up the pace again. Tesaro's lead drug makes it hard for tumor cells to repair their DNA and was the first specifically approved to prevent ovarian cancer from recurring after treatment with standard chemo.
While most ovarian cancer patients respond to initial chemotherapy, the tumors tend to return with a vengeance. Subsequent rounds of chemo are generally less effective, which explains why Tesaro stock shot up following Zejula's approval last March. The FDA essentially made it the first medication to lengthen the span between rounds of chemotherapy for ovarian cancer patients.
In a study that led to the drug's approval, a majority of patients given Zejula went 21 months or longer without showing signs of disease worsening versus just 5.5 months for those given a placebo. With a wholesale acquisition cost of $14,749.50 per month, long spans between chemo rounds were expected to drive Zejula sales above $2.0 billion.
Zejula's commercial launch got off to a strong start but hit a speedbump in the third quarter last year when the FDA expanded the drug label of another PARP inhibitor to include the same patients eligible for treatment with Zejula. In the fourth quarter, U.S. sales of AstraZeneca's (NYSE:AZN) Lynparza surged while Zejula's launch trajectory tapered off considerably.
An easy favorite
Vertex Pharmaceuticals has the highest price-to-sales ratio, but it also has rapidly rising profits from its CF monopoly. The company reported its first annual profit in 2017, which worked out to $1.04 per share. This year, the average Wall Street analyst expects a nearly three-fold increase to $3.06 per share and another big gain in 2019 to $4.54 per share.
At recent prices, Vertex has a long way to fall if its CF franchise stumbles. That said, there isn't much on the horizon to get in the way. Galapagos (NASDAQ: GLPG) is probably closest, but still years from filing an application for its first CF therapy. With the CF space all to itself, this stock has a good chance of meeting the sky-high expectations placed on it.