Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Biotech / Medical : Biotech Valuation -- Ignore unavailable to you. Want to Upgrade?

To: Biomaven who wrote (84)	3/17/1999 11:19:00 PM
From: John Metcalf	Respond to of 52153

Earnings and sales models are interesting learning tools, but not very useful for comparing companies. Too many factors intrude, like various partnership arrangements, royalties, manufacturing and distribution deals, and country-by-country rights to the product. In addition, there are huge differences in costs to manufacture various drugs, issues with inclusion on formularies, and cost-approvals in separate countries. When a biotech finally develops revenues, they have the opportunity to fund research they couldn't afford in the past, which discourages the earnings-driven investor. At the same time, management is absorbed by new issues like multi-country regulations, and sales, and marketing. All the while, the patent clock is ticking and competitors are working on next-generation products. Consider the PSR and P/E comparisons generated by several different situations: Cytogen was bid way up on ProstaScint and Quadramet, but very little money fell to CYTO while the stock went from $20 to $2 because of multiple partnership agreements. Biogen took off when Avonex went from royalty to production. Biochem Pharma languished in (partially) similar circumstances. Agouron, one of the all-time biotech successes, lost 60% of its stock value in the 18 months following Viracept approval, and was taken out for just a 20% premium to its pre-approval price. I would add the observation that many biotech stock values decline during the transition from developmental stage to production. After all, they need for the majority of shares to be sold to a different kind of investor. Peter, the old truism is called the Merck Ratio. From your list, it appears to still hold. There was a brief time when the biotech universe virtually caught up with Merck, just below $100B. The ironic (and ultimately mistaken) reasoning of the market seemed to be, "if biotechs are worth that much, Merck's worth a lot more -:)"