WSJ write-up part 2:
>>Fast-acting
In mid-June, Mr Maris started recommending shares when they traded for $38.75. As of last Friday, when he downgraded the stock, it had soared 64%--a spectacular showing given the current market plunge.
Consider investor's enthusiasm: at the stock's current price, the market values Sepracor at $1.7 billion, even though the company has yet to earn a dime and is expected to post more than $70 million in losses this year. Some analysts don't look for the company to be profitable until 2001, when Morgan Stanley predicts that Sepracor will report sales of $477 million.
Of course, biotech firms trade on long-term promise, not near-term profits. But Mr Maris says he still can't find enough business several years from now to justify the company's stock price. He expects Sepracor to report earnings of $1.15 a share in 2000 and $3.80 in 2001. Like most biotech analysts, he discounts those earnings back to the present to come up with a reasonable stock price--all the while factoring in how fast he believes earnings can grow once the company has established products to sell.
He figures Sepracor can ultimately sustain an enviable growth rate of 25% to 30% a year. Yet, even with that assumption, he pegs the stock's fair value at $52 to $57, substantially lower than its price today [not any more--BMV].
Investors, Mr Maris says, are ignoring what he calls "innovation risk". Major pharmaceutical firms aren't standing still. So as Sepracor works on knock-offs, these companies could come up with a whole new product. Or there's the other scenario: doctors and patients simply resist switching to Sepracor's new and improved medications, at least for a time.
"People assume 100% rapid conversion to new, improved drugs," he says. "It's almost never as smooth as expected." |
