Monday, April 5, 1999
The valuation gap between the mature biotechnology companies
and their younger siblings is widening as Wall Street continues to assign pharma-like
valuations to biotechnology companies with sales and earnings.
As the first quarter stock performance attests, big cap biotech
continues to dominate investor attention. After posting a 79 percent gain in
1998, the group of biotechnology companies valued over $1 billion was up 12
percent in the first quarter. Five out of the other six market cap subgroups
traded down on the quarter (see A3), and the group over $1 billion is
the only one to post gains in both the first quarter of 1999 and all of 1998.
Hit the hardest in the first quarter were companies between
$301 and $400 million, which shed 24 percent. The only other gaining subsector
on the quarter was the group of microcap companies valued less than $100 million,
which added 8 percent - small consolation after losing 40 percent in 1998.
A snapshot of the trailing 12-month price-to-earnings ratios
of the top five biotechnology companies by market cap versus the P/Es of the
top five pharmaceutical companies shows that Wall Street is warming up to paying
similar multiples for biotech companies. This is a departure from a year ago,
according to Sven Borho, general partner at OrbiMed Advisors. "Big, profitable
biotechs used to trade at a discount to big pharma, fetching 1 times growth
rates in mid-1998. Now they're trading at similar valuations of 2 times internal
EPS growth rates."
Of the five biotechs, Genentech Inc. (GNE, South San Francisco,
Calif.), Biogen Inc. (BGEN, Cambridge, Mass.) and Immunex Corp. (IMNX, Seattle,
Wash.) trade at multiples exceeding 60 times last year's diluted earnings per
Borho likes to use Amgen Inc.'s current run to illustrate how
big cap biotech is closing the gap with pharma. At a 45.7 P/E, AMGN (Thousand
Oaks, Calif.) has the smallest multiple of the big gap group. But the stock
is up 146 percent in a year. "Amgen is a two-product story that everybody hated
at 15 times earnings. Now it's multiple is 3 times that and investors can't
get enough of it," Borho said.
Indeed, Anders Hove of BB Biotech thinks there is room to grow.
"There is still quite a gap," between large cap biotech and pharma, he said.
"Over the next nine to 12 months, large cap biotech could move another 40 percent,
because many more funds can invest in those names" as they get bigger and continue
to show earnings growth.
Effects on fundraising
The mature companies also are garnering the money. Of the $1.3 billion raised in the first quarter by 84 companies, $438.5 million (34 percent) was raised by only six companies, four of which have products (see BioCentury Extra, April 2). Thus companies such as Idec Pharmaceuticals Corp. (IDPH, San Diego, Calif.) were able to raise significant amounts of money - $100 million in IDPH's case - via note offerings.