Valuation within the biotech industry can be extremely difficult. Many biotech and pharmaceutical companies go into public trading before earning a profit or any revenue. These companies are staking their value based on their intellectual property and their potential for earnings in the future. Investing in these fledgling companies can be risky, as many of them are awaiting FDA approval on drugs that will have massive implications on their ability to produce profit. On the bright side for investors, the limited information surrounding many of these companies and their somewhat risky future can lead to an undervaluation of their stocks.
Other companies are undervalued in the biotech and pharmaceutical industries for completely different reasons. These companies are sometimes even harder to seek out, as they do not have an obvious catalyst on the horizon that will skyrocket their revenue from zero to $1,000,000,000. When searching for this type of undervalued company, one must still search for a potential stimulant that will help the company grow in the future, but also analyze the ratios and figures that are relevant to the current operations within the company. Two of the most popular ways to measure the value of a stock are using the P/E ratio (Price/Earnings Ratio) and EPS (Earnings Per Share). The P/E ratio is the most widely used metric to measure a stock’s value because it shows the relationship between a stock’s price and the company’s total earnings. A simple way to think about a P/E ratio is to say that if a company has a P/E ratio of 20, you are paying $20 to claim $1 in earnings. Certain industries have a higher P/E ratio because people are willing to pay more within an industry that they believe is more likely to provide returns on their investments in the future. Therefore, when using this metric to evaluate a stock, it is most useful to compare the P/E ratio across the same industry.
EPS is another popular method to search for value in a stock. EPS is calculated by taking the earnings left over for shareholders and dividing by the number of shares outstanding. The final product can be used to compare how much each company has made for each of its shares. Once again, comparing this metric between companies in the same industry can signify whether something is a good investment. These two metrics are important in comparing companies across an industry and can help investors find value.
For earlier stage biotech a lot of these traditional metrics, including P/E ratio and EPS, are not applicable. For these pre-commercial companies, most of their valuation is reliant on their total addressable market and the probability that their product will be passed by the FDA. The pre-clinical and the clinical stage companies are often valued on where they are in the process of approval. If investors can identify a pre-clinical company that that shows great promise, more often than not, this company will be undervalued relative to its future returns.
Bristol Myers Squibb ($BMY)
Bristol-Myers Squibb Co. ($BMY) is a global biopharmaceutical company which focuses on many areas of disease and illness. It is prominent in its industry for manufacturing drugs in areas such as cancer, cardiovascular disease, diabetes, HIV/AIDS, hepatitis, and psychiatric disorders. Most of its revenue comes from its dealings in oncology, which now accounts for roughly 66% of its total revenues (more than $27 billion last year). With a market cap of $148.48 billion, it is already considered a relative giant in its industry but is currently undervalued in the stock market. This company is undervalued and will hopefully see increases in its value in the future due to its upcoming catalysts in the near future and its already low share price.
One of BMY’s most popular drugs, Opdivo, has run into some problems lately. Opdivo is a drug that can be used to treat certain types of esophageal cancer, stomach cancer, non-small cell lung cancer, along with a few other types of cancer. In the first quarter of 2021, sales for this drug have fallen 3% and competition from a similar drug, Keytruda, is growing stronger. These problems seem worrisome to some investors and has caused the share price to decrease. Many investors fail to see that Opdivo still has the potential to act as a catalyst for future success. The FDA is expected to issue a decision on the use of “Opdivo as an adjuvant therapy in patients with muscle-invasive urothelial carcinoma by Sept. 3, 2021”. This decision could prove to be extremely lucrative for BMY as it opens a new addressable market for this drug which is expected to increase sales by an additional $3.5 billion per year between 2025 and 2028. This drug also holds future potential for partnerships and combinations with different drugs and companies in the field of oncology. BMY has just entered a partnership with AVEO Oncology and combined the use of the drugs Opdivo and Fotivda for patients with advanced relapsed or refractory renal cell carcinoma. There is still profitability through the use of this blockbuster drug despite the recent uptick in competition.
Not only is BMY at the forefront of innovation within its industry, it also is undervalued when comparing its stock price to its earnings. BMY’s P/E ratio is currently 10.33, which sits well below the industry average of 30.72. It also bolsters a healthy 2020 EPS of $1.84 which is extremely competitive for its industry. Both of these metrics contribute to the fact that BMY is currently undervalued and could prove to be a smart investment.
SIGA Technologies ($SIGA)
Another company that is currently undervalued is SIGA Technologies ($SIGA). This stock has extremely sound fundamentals and an impressive balance sheet that shows stability within its field. As opposed to many biotech companies that are surviving on fumes and the hopes of a breakthrough, SIGA is cashflow positive and its revenue has remained steady over the past three years. SIGA even had a 365% increase in revenue from 2019 to 2020, and has continued this trend of success in the first quarter of 2021. SIGA has found much of its success in its sale of its drug TPOXX which is used for the treatment of smallpox disease in adults and pediatric patients. While outbreaks of smallpox are mostly a thing of the past, this disease must still be researched and combatted due to the fear of the smallpox virus being used as a bioweapon in the future. With a P/E ratio of just 7.65 compared to the industry average of about 30.72, SIGA exhibits great value. Once again, a lower P/E ratio when compared to the industry average demonstrates that the stock price is low relative to earnings. It is sometimes dangerous to place too much importance on the financial metrics that cause a stock to appear undervalued, especially within biotech when so many factors can drastically change the trajectory of a company. In this case, this risk seems small because SIGA technologies has a consistent revenue and free cash flow while its stock price remains lower than competitors in its industry.
SIGA has also continued its innovation and improvement towards the treatment of smallpox, indicating sustainable increases in the future. SIGA recently filed a New Drug Application for the approval of an intravenous formulation (IV) of TPOXX. This new method would hypothetically be used to administer this drug to those who are too sick and unable to take the capsule orally. These types of improvement are important when marketing to governments and potential customers for this method of defense for bioterrorism. Most of the customers for this type of medication are national governments that may have to defend against a biological attack in the future. SIGA has established collaborations and partnerships with the U.S government and the Public Health Agency of Canada. If SIGA can continue to sign deals in new markets, their low price and inconsistent market performance will both improve. This stock has a lower ceiling and is slightly less exciting than many other investments in the biotech industry, but it is still undervalued and could prove to be a worthwhile investment in the long term.
Fate Therapeutics ($FATE)
Some biotech companies are undervalued due to the simple fact that they have not been able to generate revenue through the sale of their products. These companies are in the clinical or pre-clinical stages of drug development and have not been able to release their products in the market. Despite their lack of revenue, these companies are still able to be publicly traded at a large volume. Many liken this phenomenon to the real-estate industry and the process of buying land under the presumption that its value will increase due to a facility/building that will eventually be installed. Biotech companies that are in phase 1 of drug development are being valued on the milestones they reach in their stages of development. These milestones indicate that there will likely be profit in the future. In the case of Fate Therapeutics ($FATE) their market cap of $8 billion is significantly larger than their yearly revenue of $40 million, yet their stock price has seen recent increases.
Fate Therapeutics is a company that focuses on oncology and immunology treatments based on natural killer T-Cell programs. The development of programs FT500 and FT516 for the treatment of advanced solid tumors has drawn the interest of many investors and helped the company’s stock performance. This performance will most likely continue its momentum for the short-term future due to their positive feedback during their phase 1 testing of FT516. The field of oncology has a massive addressable market and Fate Therapeutics has the ability to capitalize on this market with its innovations. The current market cap of $8 billion may seem alarmingly high for a clinical-stage company but the oncology market is home to some of the most successful biotech products of all time and has huge upside. For example, the product Keytruda, (used to treat diseases like melanoma, lung cancer, head and neck cancer) generated $14.4 billion in 2020 alone. While the lack of information concerning this stock’s P/E ratio and EPS make this stock difficult to evaluate, it provides great upside for investors. The evaluation is almost based purely on the phase 1 progression and success of the company’s medicine, as well as the capacity that exists in the desirable market.
Investing in biotech and pharmaceutical companies is a unique process where one can pay high prices for a share of a company that has not made a single dollar of revenue. The success stories within the biotech industry are the causes of this early stage investing, but it is difficult to determine which of these pre-clinical and clinical companies will make it through the approval process. More than 90% of drugs fail to make it from phase 1 clinical trials to the market, making these investments extremely risky. Investing in these companies’ requires extensive research concerning their progress through the approval process and the market that they are entering. The other half of the biotech industry, those companies that have begun the sale of their products in the market, can still be evaluated using these same methods. The development of new drugs is always an important factor to consider when analyzing a biotech company, but commercial-stage companies must also be analyzed using the metrics and statistics used to discern the values of traditional stocks.