Methodology for Valuation of U.S. Biotech Equity: a Wall Street Transcript Interview with Jim Birchenough, Managing Director at BMO Capital Markets and Senior Biotechnology Analyst

Wall Street Transcript

67 WALL STREET, New York - September 19, 2012 - The Wall Street Transcript has just published its Biotechnology and Pharmaceuticals Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Biotechnology and Pharmaceutical Valuations - Oncology Drug Development - Orphan Drugs - FDA Approval Process - Reimbursement Trends

Companies include: Celgene Corporation (CELG), Gilead Sciences Inc. (GILD), Regeneron Pharmaceuticals Inc. (REGN), Onyx Pharmaceuticals Inc. (ONXX), United Therapeutics Corp. (UTHR), Ariad Pharmaceuticals Inc. (ARIA), Synta Pharmaceuticals Corp. (SNTA), Rigel Pharmaceuticals, Inc. (RIGL), Isis Pharmaceuticals, Inc. (ISIS) and many others.

In the following excerpt from the Biotechnology and Pharmaceuticals Report, an experienced research analyst discusses his methods for determining equity value for investors:

TWST: You prefer U.S. biotech stocks relative to U.S. pharma stocks. Please tell us your reasons for that view.

Dr. Birchenough: If you look over the last several years, the valuations for U.S. biotech stocks have contracted substantially, where if we look at valuation relative to forward earnings, the valuations are pretty close between U.S. biotech and U.S. pharma. But with U.S. biotech, what you get that you don't get with U.S. pharma is a more sustainable growth pattern for legacy products. We don't see the patent cliffs that we see for large pharma, you see better pricing power outside the U.S. and bigger opportunities for international growth, and we think you see a greater degree of innovation, which ultimately is what drives value. And the bottom line is we think there are higher barriers to entry that are established by large U.S. biotech companies than we see with large pharma.

TWST: What are some of the most exciting new drugs or technologies coming out of your companies investors would want to be aware of?

Dr. Birchenough: I think the biggest things thematically that we're seeing from a technology perspective is continued focus on molecular diagnostics guiding molecular therapeutics in oncology, in particular. And so what we're starting to see is companies succeeding at identifying key drivers of cancer-cell growth, identifying with diagnostics what those drivers are, and targeting those patients specifically with highly effective drugs. This is an area that we think we're going to continue to see growth in and where most of the oncology studies that are starting right now are being done with molecular diagnostics and better-characterized patients and more targeted drugs targeted at these oncogenic drivers of disease.

TWST: What are some of the industry-specific metrics you use to evaluate biotech and pharma companies investors in the space should also be sure to understand and analyze?

Dr. Birchenough: I think when you look at the U.S. biotech group and you're trying to figure out where to invest, I think you want to look at the maturity of the company - whether they're preclinical, whether they're development stage, Phase I through Phase III, whether they're commercial safe. I think you want to look at how well they understand their drugs, how well characterized the drugs are in earlier-stage development because, historically, companies have not spent enough time characterizing the drugs well enough and have ended up running into toxicity problems later in development.

So I think you want to look at companies and how well they characterize the drugs in early development. You look at whether these are small molecule pharmaceuticals or if they are large molecule biologics, and large molecule biologics tend to have longer patent life and are more resistant to generic erosion, so there's a preference there for the larger biologic molecules.

And I think overall the biggest thing is when you look at U.S. biotech or any therapeutic company, look for sustainability of their growth, and that comes down to patent protection. And you want to look at companies and whether they have extended patent protection or whether they have shorter claims, and how difficult it is to copy their drugs. So those are some of the things that we look at.

You also want to look at therapeutic focus insofar as there are some therapeutic areas that are much tougher than others, and ultimately, you also want to look at relative valuation and what expectations are built into a stock. Historically, we've looked at a group of roughly 170 development-stage biotech companies over a four-year cycle, and categorized the companies by stage of development, therapeutic focus, whether they were internally developed compounds or externally in-licensed, and valuation to see if there were some trends in terms of where value is created. And what we found from that analysis is that companies - that most of the value was created in Phase II in establishing proof of concept, that, historically, as we finish one cycle - most of the value was created in areas away from oncology.

For more from this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers, and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

View Comments (0)