CHART OF THE DAY: Here's Why Investors Pay So Much For Biotech Stocks

Biotech stocks have some of the most mind-bogglingly high valuations on the planet.

But this is largely due to the fact that most of these companies’ revenues and profits don’t yet include the drugs and medical devices that are still in the development and regulatory pipeline.

In other words, these stocks are all about speculation.

The biopharma industry as a whole, which includes both pharmaceutical companies and biotech firms, bank on these pipelines for growth.

Different analysts have different estimates for what each of these companies will be able to earn based on different risk-adjusted forecasts.

“Regardless of pipeline risk adjustments, biopharma base revenues (drugs launched before 2014) will continue to decline by our estimates,” said Goldman Sachs’ Jami Rubin. “We see base revenues falling from $US222 bn in 2013 to $US205 bn in 2020E based on a mix of product growth offset by declines from patent expirations. However, pipelines (drugs launched in 2014 and beyond) more than compensate for the erosion of base revenues with $72 bn in risk-adjusted pipeline revenues in 2020E while removing the risk adjustment from pipeline revenues provides additional upside of $US41 bn for a total of $US113 bn in pipeline revenues by 2020E.”

For the biotech firms (ALXN, AMGN, BIIB, CELG, GILD, REGN, and VRTX), Goldman estimates that by 2020 these companies will be generating $32 billion from the pipeline on top of a base revenue of $US61 billion. Without the risk adjustment, you can add another $US9 billion on top of that (see chart).

When you consider this upside, you can begin to understand why people pay so much for a piece of the action.

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