Thanks, Andreas. Of course P/E ratio has no meaning for companies that are just beginning to sell product.
Since there are a number of new contributors here, it might be useful to look at a relative measure to value biotech stocks: market capitalization. There are 25 biotechs over $500mm in market cap; only 9 of which are over $1B. Of these largest, all make profits except for British Biotech (BBIOY) and Immunex (IMNX). Except for Amgen, which sells for about 20 times earnings, all these big-cap biotechs have much higher P/E ratios than S&P stocks. E.g., even at today's beaten up value, Chiron is selling for 36 times earnings. The others -- GNE, BGEN, BCHXF, CNTO, GENZ -- are at P/E's that may seem huge to the Dow stock buyer.
Why? Well, Coca Cola isn't going to increase sales by 10-fold next year. AGPH probably will. Agouron's fiscal year will end June 30, with 3 1/2 months of Viracept sales. If sales triple over their first month's level (viz. to 65,000 users by June 98), sales will be up 1000% in FY 98. This would only represent half as many consumers as Merck's Crixivan, in a market with only 20% penetration by all the approved products.
Below the $1B market cap of companies that have "arrived", there's a tier of companies that are almost there - AGPH, VRTX, LIPO, VVUS, HGSI, GILD, BTGC. They are just beginning to sell products (except for VRTX). The investor should ask whether their products will do as well as those of the first tier companies. If so, the valuations will move into that range. |
