Biotech Multiples Are Soaring But M&A Is Dead

 

NEW YORK ( TheStreet) -- In the chart above, J.P. Morgan biotech analysts Geoff Meacham and Cory Kasimov make another argument for why the biotech bull market should continue to run higher. Price-to-earnings multiples for large-cap biotech are on the rise, but that's okay because so earnings growth is also accelerating.

The sector's P/E expansion that began in early 2012 has gone almost parabolic in 2013. Take a look at the near-vertical slope of that blue line, with P/Es for stocks like Celgene ( CELG) , Gilead Sciences ( GILD), Amgen ( AMGN) and Biogen Idec ( BIIB) approaching 20 and poised to move even higher into the second half of the year.

Is the biotech multiple expansion a concern? The J.P. Morgan team thinks not because the 2012-2015 compounded annual growth rate for biotech earnings is forecast to reach 18%. Right now, the projected 2015 P/E for large-cap biotech is 14-16x.

It may be hard to believe, but revenue and earnings expectations for this year are still on the low side. Check out the slide on the next page.

Weird, but 2013 revenue (blue bar) and earnings (gray bar) expectations are lower than 2012. Biotech companies will be begin to report first-quarter earnings soon but Meacham and Kasimov expect strong results across the board, which means analysts and investors will be raising their 2013 forecasts. The "Beat and Raise" routine is usually good for stock prices.

If there's something to worry about in this chart, it's the outsized top-and bottom-line expectations already set for 2014 and 2015. But then, Gilead Sciences and Biogen Idec should be humming with their respective hepatitis C and oral multiple sclerosis drug launches.

One more slide to check out and it's a strange one. Check out the next page: Biotech mergers and acquisition activity is non-existent!

Only one M&A deal completed to date in 2013... Wow!

The dearth of deal-making hasn't hurt the biotech sector's performance this year, but how long can that last?

-- Reported by Adam Feuerstein in Boston.

Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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