As Seattle Genetics (SGEN) is a biotechnology company, it has huge research and development expenses. The company has reported losses each year. In this case, we believe that the enterprise-value-to-revenue multiple is the best measure for valuing Seattle Genetics (SGEN) and similar companies.
Forward EV-to-revenue multiples
EV-to-revenue multiples are often used to estimate a company’s valuation. A low EV-to-revenue multiple represents an undervalued company while a higher EV-to-revenue multiple represents an overvalued company. On April 18, 2016, the company was trading at a forward EV-to-revenue multiple of ~10.5x. Based on the last two years’ multiple range, SGEN’s current valuation is moderately high, with its EV-to-revenue multiple ranging from ~7.0x to ~17.0x.
The industry currently trades at a forward EV-to-revenue multiple of ~5.4x. Competitors ARIAD Pharmaceuticals (ARIA), Incyte (INCY), and Vertex Pharmaceuticals (VRTX) have forward EV-to-revenue multiples of 6.1x, 12.4x, and 8.2x, respectively.
As the company reported losses due to huge research and development costs, it did not declare a dividend in 2015. The dividend yield for the Healthcare Select Sector SPDR ETF (XLV) was ~1.5%.
To divest risk, investors could consider ETFs such as the First Trust NYSE Arca Biotechnology Index ETF (FBT), which holds ~3.5% of its total assets in Seattle Genetics, or the SPDR S&P Biotech ETF (XBI), which holds ~1.0% of its total assets in Seattle Genetics. XBI also holds 1.4% of its total assets in Achillon Pharmaceuticals (ACHN), 1.3% in Prothena (PRTA), 1.6% in Ophthotech (OPHT), and 1.3% in Myriad Genetics (MYGN).