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Two Emerging Growth Biotechnology Stocks Hit $10B+ Valuations: INCY, PCYC

|Includes: Incyte Corporation (INCY), PCYC

Biotechnology Bubblet- How High Can These Stocks Run?

We reviewed mid-cap biopharmaceutical valuation in early October as part of our overall market model for a sector that defies classical analysis. Two emerging growth stocks in our model focused in oncology have soared to the $10B market cap level which corresponds to the acquisition price of Onyx Pharmaceuticals by Amgen (NASDAQ:AMGN).

Two market mavens have compared the current biotech "bubblet" to 1999 so we will see if the turn comes in 2014.

How Do We Value Biotechnology Stocks? |

The rally today brought both Pharmacyclics (PCYC$139.85) and Incyte (INCY $69.13) near all time 2014 highs and market capitalizations. This relates to one component of our valuation model which is based on the acquisition of Onyx at the $10B level. Pharmacyclics received FDA approval for ibrutinib for CLL . Incyte reported 2013 results and pipeline updates which was received positively driving stock up 5%. Using current 2014 product sales for guidance at $335M Incyte is valued at 33x product sales giving its pipeline a valuation of compared to Onyx. Pharmacyclics (NASDAQ:PCYC) with 2014 Revenues forecasted at $329M has valuation of 31X product sales. Onyx was valued at 17.5X sales when acquired by Amgen (AMGN) but also had 9 products in its pipeline. So pipeline valuations of INCY and PCYC is in the $5B+ range using a simple comparison of 17.5X sales. Pipeline valuations are extremely difficult to do because of all the assumptions involved : product approval dates, 7 year sales forecasts, labeling etc.

Pharmacyclics (PCYC) has been on our focus list since 6/8/12 at a price of $38. Other Rayno movers today are : Achillion (ACHN $3.67) and Seattle Genetics (SGEN$51.33)

Valuations of biotech stocks depend on more than just M&A but at least this is one benchmark. Currently we are in a momentum driven bull market where institutional and even retail investor demand drives stocks. That is why technicals are very important. If we are looking for a correction or even a bear market we would more likely see it with smaller cap speculative stocks with less mature pipelines and no revenues.

Stay tuned as our model evolves.

Disclosure: I am long ACHN.

Additional disclosure: I am long Fidelity Select Biotechnology Fund FBIOX