Biotech investing may be riskier than other types of investing such as real estate investing, but it also comes with big payoffs. Recently three biotech stocks have been rising and have investors paying high premiums. These three stocks are Ionis Pharmaceuticals Inc., Vertex Pharmaceuticals Incorporated, and Tesaro Inc. So why is everyone paying so much in premiums?
Ionis Pharmaceuticals is the founder of RNA-antisense technology. It’s first commercial stage product, Spinraza had a record-breaking season, and the FDA has already begun reviewing applications from the company for two new drug candidates with 9 figure sales potential.
Spinraza is the first FDA approved treatment for patients with Spinal Muscular Atrophy, the most common genetic cause of infant mortality. Because it is the only treatment of its kind Ionis’ marketing partner made $884 million in global Spinraza sales last year. Ionis’ share of the sales was at $113 million. Ionis is directing this revenue toward drug candidates it owns.
Investors don’t mind paying 13X the trailing sales for biotech stocks because Ionis has a huge internal cycle and the potential for high-margin royalty revenue to fund further development.
Earlier this year the FDA accepted an application for inotersen, a candidate intended to treat transthyretin amyloidosis. While Alnylam Pharmaceuticals already has a TTR drug, patisiran, under review as well. Inotersen could eventually earn Ionis an addition $300 million in revenue.
Vertex Pharmaceuticals is the only company marketing therapies that attack the cause of Cystic Fibrosis (CF). CF limits lung function and shortens the lifespans of 75,000 people. This complete control of the market is just one reason why investors are willing to pay 17 times trailing sales for this stock.
On top of this Vertex is also expanding its customer list. Vertex started the year with 2 CF therapies and had 34,000 qualifying patients; however, a third CF therapy, Symdeko, which could expand Vertex’s customer base to 44,000; Vertex also has a couple of experimental treatments in the late- stage of testing, which could further boost the number to 68,000.
Combine this with the fact that a wholesale acquisition cost of a year of treatment is 292,000 dollars, and patients will need this treatment throughout their lives. It’s easy to see why someone would pay such a high premium.
Tesaro Inc. is the maker of Zejula a drug that makes it hard for tumor cells to repair their DNA. This drug was first used to keep ovarian cancer from reoccurring after standard chemo treatments. Chemo is painful and draining often causes pain, which requires medications like medical marijuana to ease. It’s no wonder why stocks soared after Zejula came into the market. Ovarian cancer tends to respond well to initial chemo treatments but is known to grow back and be unresponsive to subsequent chemo treatments. It’s the first medication to lengthen the span between rounds of chemotherapy extending the time from 5.5 months to 21 months or longer.
The FDA expanded the drug label of another PARD inhibitor to the same patients. This drug was AstraZeneca’s Lynparza. The price of Tesaro stock is still 13 times that of the trailing sales but has stopped growing.
In a world continually searching for cures to new diseases, it’s easy to see why companies posed to corner a market would be able to charge more for a share. While Vertex is clearly in the best shape of all three companies, all of them have a firm stake in biotechnology and prove it by demanding high premiums.