Please ensure Javascript is enabled for purposes of website accessibility

Are These Billion-Dollar Biotechs Overvalued?

By Keith Speights - Apr 23, 2013 at 1:51PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

They don't have any products on the market, but they sport market caps around $1 billion or more. Are these 2 biotechs overvalued?

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 (NASDAQ: PCYC) and Sarepta Therapeutics (SRPT 0.72%), 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 (JNJ 0.73%) 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 (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 (VRTX 0.77%) 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.

Overvalued?
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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Sarepta Therapeutics, Inc. Stock Quote
Sarepta Therapeutics, Inc.
SRPT
$71.64 (0.72%) $0.51
Johnson & Johnson Stock Quote
Johnson & Johnson
JNJ
$178.27 (0.73%) $1.29
Vertex Pharmaceuticals Incorporated Stock Quote
Vertex Pharmaceuticals Incorporated
VRTX
$260.58 (0.77%) $1.99
Alexion Pharmaceuticals, Inc. Stock Quote
Alexion Pharmaceuticals, Inc.
ALXN

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
330%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/23/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.