I get a lot of email messages from readers, and I want you to know I do take the time to read them all. Unfortunately, I can't answer all of them, but after last week's

column on

Protein Design Labs

(PDLI) - Get Report

, I got some interesting questions from readers about the pricing of biotech stocks. Most of the questions had to do with how to evaluate biotech stocks' price, what makes their prices move and how much one should pay in general for a biotech stock.

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To answer these questions, I'm going to use two profitable biotech companies,

Immunex

(IMNX)

and

Amgen

(AMGN) - Get Report

, as examples. (Both companies also just happened to present data on each of their rheumatoid arthritis drugs at a scientific meeting, Immunex's Enbrel, and Amgen's Kineret.)

Judging from the press releases, both drugs sound great, but this obviously doesn't help you decide which company to invest in.

One of the ways to help size up whether a stock is priced correctly is to determine its

price-to-earnings to growth ratio, or PEG ratio. This is simply a stock's price/earnings ratio divided by its year-over-year earnings growth rate. The lower the ratio, the lower the amount of risk there should be.

Immunex, which derives most of its earnings from sales of Enbrel, currently trades at 85 times its projected 2002 earnings of 30 cents per share. The forecast of per-share earnings growth for 2002 is 3%. Eighty-five divided by 3 works out to a very high and unattractive PEG of about 28.

Let's compare that with Amgen, a very large biotech company whose drug pipeline is more diverse. The company is a maker of Epogen, a blockbuster anemia drug, and coming to the market soon is its second-generation version of Epogen, Aranesp, which is expected to do just as well. Amgen currently trades at 40 times its expected 2002 earnings of $1.40 per share. Its expected 2002 EPS represents a 19 percent increase over 2001's earnings. Forty divided by 19 is about 2, giving Amgen a much lower PEG ratio compared to Immunex's.

But you shouldn't base your investing decisions solely on PEG ratios. Like most ratios and valuation measures, it represents only one view of a company and its prospects. The figures don't show, for example, that Immunex's Enbrel is a very good drug that not only treats rheumatoid arthritis, but also the underlying cause, to prevent further damage, which is a key point for patients.

Several months ago I

wrote about Immunex, and since then its share price has done well. Once the company's manufacturing process starts to output more product, good things should come to the company. It's just darn expensive now. And never mind about what appears to be looming competition for Immunex with Amgen's drug.

When Amgen's Kineret

does

get approved for marketing, it will be used as a second-line defense for patients who failed with Enbrel or can't get a prescription for it. This is probably why Immunex's share price closed up and Amgen's share price closed down when both companies made their announcements on their clinical progress for each of their rheumatoid arthritis drugs on the same day. The bottom line is that Immunex has the better drug to treat rheumatoid arthritis, and eventually the company will expand its uses to other diseases, thereby generating more revenue for the company.

But a look at their PEG ratios suggests Amgen is currently the better buy. Amgen has better overall growth prospects based on its product pipeline, compared with the more expensive Immunex. The point is that while a PEG ratio is a number that can't tell you everything, the more ways you look at a stock, the more rounded and well-informed your view will be. Keep in mind that looking at PEG ratios works only for biotechnology companies that already are profitable, the numbers of which are growing.

Of course, there are many biotechs that have yet to show a profit. Evaluating those companies is a whole different ballgame, which I will save for another time.

Nadine Wong is the editor, publisher and co-founder of the

BioTech Sage Report

and contributes a weekly biotech column to this site. At the time of publication, Wong held positions in Immunex and Amgen, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While she cannot provide investment advice or recommendations, Wong invites you to send comments on her column to

Nadine Wong.

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