It was not too long ago that leading biotechnology companies fetched premium multiples to their large-cap pharmaceutical competitors. As the large well known pharma companies face many patent expirations in coming years, smaller and more growth-oriented biotech firms commanded both higher valuations and more favorable outlooks among investors. However, for some reason in recent months we have seen biotech stocks give up much of that premium. For the first time I can recall, many biotechs trade for below-market prices, in-line with slower growth pharmaceutical counterparts.
Here is a summary of some leading large cap stocks in both the biotechnology and pharmaceutical areas. You can see that the P/E ratios are very similar but the projected growth rates are meaningfully higher for the biotech sector, by a factor of nearly 5x. The only conclusion I can make from this is that biotech stocks continue to deserve higher relative valuations, but for some reason Wall Street has lost sight of this recently.
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What makes this more incredible is that biotech stocks are much harder to replicate by generic companies after patent expiration due to the complexity and expenses of making the drug. So the durability of the earnings should be higher over the long-term.