Are Biotech Valuations in the "Bubblet" Phase?
In September of 2013 we wrote about the valuations of biotechnology companies from an M&A perspective after the acquisition of Onyx Pharmaceuticals (ONXX) by Amgen (AMGN) at a price of $10.4B. We will attempt to develop a model going forward that provides valuation metrics for emerging biopharmaceutical companies that have promising pipelines and are ramping up the sales curve. Valuations should be relative because classical metrics like PE, P/S, cash flow etc. are not easily applicable to emerging growth companies. Many industry analysts use net present value (NPV) models which require good forecasts of Product Revenue, a daunting task for pipelines that are at Phase II. Our model will look at comparable valuations because it is more market dependent. The benchmark for comparison can be recent acquisitions like Onyx by Amgen as that reflects current financial metrics from experienced large Company management.
In future articles we will look at biopharmaceutical companies with market caps under $3B with less mature pipelines. This is where valuations may be stretched by momentum investing.
We have written about the drivers of the four year old biotech bull market many times but for now let's focus on two primary drivers:
- M&A- Strategic buyers (big pharma and biotech) seek revenue and product pipeline for future sales growth. Expectations and rumors drive stock prices up. Product portfolio fit is also important for the acquirer e.g. cancer, ultra-rare and infectious diseases.
- Investor demand for life science stocks is high because more institutional investors are participating in biotechnology markets. Speculation is very high among retail investors. Momentum begets momentum but this week momentum is waning.
M&A is more value driven whereas "Investor Demand" is better suited to technical analysis as we are at the higher end of valuations.
The biotech bull market is driven more by sentiment and behavioral investing because product news, deals and overall ebullience drive prices up on a limited supply of quality stocks. The supply of stocks has been more limited over the past five years due to a shortage of venture capital and inadequate funding of early stage companies.
As more acquisitions are completed we can approximate valuation limits for a strategic buyer. We suggest two companies that offer good comparables for mid-cap valuations: Onyx and Clovis Oncology (CLVS) who recently announced they are up for sale. There are many more smaller deals but for now we will focus on mid-caps in the $5-15B range of market caps. Clovis Oncology is unique because no product revenues are forecasted for 2014.
Our model will look at several "emerging growth" companies in the cancer and "orphan disease" area with the following criteria:
- Robust pipeline and selling an approved product.
- "Mid-caps" in $3-12 B range.
- Strong Institutional holdings.
- Strong balance sheet.
Here is an updated chart (with recent prices) from our last article. Some of these names have been rumored as acquisition targets and all are institutional favorites. Valuations have risen since early September but peaked in early October. Alexion (ALXN) and Regeneron (REGN) are well capitalized growth companies and are more likely to remain independent and to be considering acquisitions.
Leading Biotechnology Companies Focused in Cancer and Immunology
|Company||Ticker||Price $||Market||2013/'14 Est||P/S||SE||DiseaseFocus||Ph.2/3|
|Cap $B||Revs $B||$B||Pipeline|
|Clovis Oncol||CLVS||72.44||2.19||na/na||n/a||0.36||ovarian cancer,NSCLC,||4 Ph.1|
|Puma Bio||PBYI||57||1.7||na/na||n/a||0.11||breast cancer, NSCLC||5,1|
Emerging Growth Biopharmaceutical Companies Focused in Cancer
Here is a chart of the same well known companies excluding Alexion and Regeneron that satisfy the above criteria in order to compare relative valuations and pipelines in cancer therapy companies. All of these companies are favorites among biotechnology investors with strong management and a proven ability to get products through the regulatory phases.
|Company||Ticker||Price||Market||2013/'14 est||P/S||SE||Cancer Disease Focus||Phase 2/3||Market|
|Ariad||ARIA||18.2||3.4||0.07 0.169||20||310||blood cancers and solid tumors||8, 1||ponatinib(TKI)|
|Biomarin||BMRN||72.3||10||0.551/0.679||14.7||1,259||rare genetic diseases include cancers||2,1||4 products(enzymes)|
|Incyte||INCY||38.3||5.45||0.35 0.51||10.7||-28||myelofibrosis,pancreatic, solid tumors||11, 1||ruxolitinab (JAK)|
|Medivation||MDVN||57.6||4.32||0.24 0.40||10.8||61.6||prostate,breast||4, 1||enzalutamide (TNBC)|
|Pharmacyclics||PCYC||135||9.85||0.17 0.33||29.5||213||blood cancers||6, 0,||ibrutinib (BTK)|
|SeattleGenet||SGEN||44.2||5.36||0.24 0.28||19.1||237||ADCs for lymphomas and solid tumors||5, 4||brentuxamab (ADCs)|
|Onyx||ONXX||125||9.14||0.634 0.876||8.7||n/a||liver, kidney, colorectal||0, 9||now Amgen|
|Clovis||CLVS||55.9||1.5||n/a||n/a||363||ovarian and breast cancers, NSCLC,DX||n/a||EGFR, PARP|
We will use this base valuation model to do comparative valuations going forward. The next step is to do a detailed analysis of the pipelines using Onyx (now Amgen) as a model at the high end and Clovis Oncology as a model at a lower end.
Some key points it consider:
- M&A is less likely to be a driver for biopharmaceutical stocks in the near term because strategic investors must do a rigorous analysis to show long term value and accretive earnings for the deal.
- Institutional investors are the prime engine driving biotechnology stocks higher using momentum investing tactics.
- We are in a secular bull market for life science stocks with investors seeking growth companies less affected by macro considerations, but we have reached the point where speculation has driven prices of some stocks to levels that are vulnerable to severe declines.
- A detailed analysis of pipelines, drug targets and milestones is needed to fully understand technology value.