The valuation of biotechnology companies (IBB) depends on two key factors: net profits earned by the drugs already launched in the market and the expected future profits from the drugs in the company’s research pipeline.
Since the second half of 2014, Biogen’s valuations have continued to be high, buoyed by strong performance and high investor expectations.
The above graph shows the current enterprise value (or EV) to forward earnings before interest, taxes, depreciation, and amortization (or EBITDA) of leading biotechnology players Gilead Sciences (GILD), Amgen (AMGN), Biogen (BIIB), and Celgene (CELG).
Relative valuation using EV-to-EBITDA multiples can provide limited insight to the true value of a biotechnology company. Because a large portion of a biotechnology company’s value is derived from its R&D assets, as well as the flexibility to continue or abandon R&D, discounted cash flow valuation (or DCF) and real option valuation prove to be more effective valuation techniques.
However, both the methods are extremely sensitive to inputs related to future riskiness and returns of the company. So, wrong inputs can lead in returning erroneous company values. Relative valuation, however, can help us understand the value attributed by the market to a biotechnology company.
Since 2013, Biogen has introduced four new drugs: Tecfidera and Plegridy in the multiple sclerosis market (or MS), and Alprolix and Eloctate in the hemophilia market. Tecfidera proved to be a huge commercial success, as the oral MS drug won market share from its competitor drugs Aubagio and Gilenya. By the first quarter of 2014, the drug earned about $1.38 billion, entering the league of blockbuster drugs—drugs crossing $1 billion revenue mark.
According to Reuters, the hemophilia drug Eloctate is also expected to join the blockbuster category, as it is estimated to earn about $1.5 billion by 2019. Eloctate reduces the dosage frequency from the standard twice or three times in a week to once every three to five days. It is priced on par with the existing hemophilia therapies. This is expected to boost the demand for the drug. Projections of strong future sales has helped boost share prices and valuation for Biogen.
The better-than-expected positive clinical trial results for Biogen’s experimental Alzheimer’s drug, BIIB037 or aducanumab, in March 2015, further increased the investor confidence in Biogen. As there is no effective competition in the Alzheimer’s segment, Biogen’s drug has the potential to be a significant commercial success.
Additionally, Biogen is also conducting late-stage clinical trials for its drug Tysabri to check for its usage in late-stage MS patients. Earlier stage results for Tysabri and anti-LINGO, another MS drug, have been positive. Biogen’s valuations continue to be high, as investors expect the launch of more blockbuster drugs in the future.
Investors can take a diversified exposure to the high-performing biotechnology stocks such as Biogen, Celgene, and Gilead Sciences by investing in the iShares NASDAQ Biotechnology ETF (IBB). IBB holds 7.48%, 8.58%, and 7.64% of its total holdings in Biogen, Celgene, and Gilead Sciences, respectively.