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Warning: These Could be the Top 3 Most Overrated Biotech Stocks

6/19/2017 6:41:47 AM

Warning: These Could be the Top 3 Most Overrated Biotech Stocks June 19, 2017
By Mark Terry, Breaking News Staff

As most investors know, at least if they take time to think about it, stock value is a funny thing. After all, why would the value of a company fluctuate so much from day to day? And while certain metrics, such as price/earnings to growth ratio (PEG), can tell investors something, the metrics’ values may or may not be a direct reflection of the company’s real market value.

Keith Speights, writing for The Motley Fool, analyzes three biotech companies that, according to their PEG ratios, are wildly overvalued. But are they really?

1. Amgen

Headquartered in Thousand Oaks, Calif., Amgen (AMGN) is a research-based biopharmaceutical companies with almost 20,000 employees worldwide. In 2016, it reported total revenue of $23 billion. Its product sales were $21.9 billion and its R&D expenses were $3.8 billion. It has a market cap of about $120 billion, and its stock price has more than doubled in the last five years.

But Amgen’s PEG ratio is 3.15, largely because analysts think its growth is going to slow dramatically. Which makes the company’s stock seem overpriced.

A lot of that pessimism is based on first-quarter sales, where two out of three of the company’s top drugs dropped compared to the previous year. The exception was bone marrow stimulant Neulasta. And even Neulasta sales grew by only 2 percent year over year.

The company has Repatha, for cholesterol, and Blincyto, for blood cancer, that are still growing and likely will continue to. And it has potential blockbusters in its pipeline.

Speights writes, “So is Amgen wildly overvalued? If you only look at the PEG ratio, the answer is yes. The problem, though, is that doesn’t account for Amgen’s huge cash stockpile and strong cash flow. The biotech has plenty of money to make acquisitions that could improve its growth prospects. Amgen stock is expensive, but I wouldn’t hate on this stock too much.”

Amgen stock is currently trading for $163.07.

2. Illumina

Based in San Diego, Illumina (ILMN) is the dominant player in the gene-sequencing technology arena. The company employs more than 5,500 people worldwide, and in 2016 reported revenue of $2.4 billion.

Over the last five years, company stock has grown almost 340 percent. It has a market cap of about $25 billion, and a PEG ratio of 3.36. Over the next five years, analysts project average annual earnings growth of 14 percent, which is good, but lower than the 20 percent growth it’s reported in the last couple years.

Illumina recently launched a new NovaSeq sequencing system, which is likely to have short-term disruption to the company because while customers transition to the new technology, they slow down buying consumables for their old systems.
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Speights writes, “I’ll be the first to admit that Illumina has a stratospheric valuation compared to most stocks. However, the valuation has actually been a lot higher in the past than it is now. I also think that Illumina’s growth prospects could be better than expected with the roll-out of NovaSeq and the precision medicine initiative in China.”

Illumina stock is currently trading for $171.76.

3. Sarepta Therapeutics

Headquartered in Cambridge, Mass., Sarepta Therapeutics (SRPT) was the company to watch—sometimes in delight, sometimes in dismay—in 2016, as it carried on a dramatic, roller-coaster ride to get Exondys 51, its drug for Duchenne’s muscular dystrophy (DMD), approved by the U.S. Food and Drug Administration (FDA).

As a result, over the last five years it gained over 650 percent, and has a PEG ratio of almost 170. Speights points out that the PEG is very high because the company is only starting to market Exondys 51 and hasn’t made that much revenue from it yet. And despite it really being the only treatment for DMD, the drug exists under several dark clouds.

First, the FDA gave the drug provisional approval—it has to continue to conduct a clinical trial for two years, and if it fails, the approval could be rescinded. Second, Exondys 51 has a shockingly high price, averaging $350,000 per year. And third, because of the price and because of legitimate questions remaining over the drug’s efficacy, some insurance companies have either declined to cover the drug, or have done so with strings attached.

Speights writes, “If payers ultimately decide to cover the drug, Exondys 51 could eventually generate sales of $1 billion or even more. In that scenario, Sarepta’s market cap of roughly $1.8 billion isn’t too high at all. If payers don’t cover the drug, however, Sarepta Therapeutics just might be the most wildly overvalued stock in biotech.”

Sarepta stock is currently trading for $33.14.

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