Valuing Biotech firms is one of the world's greatest mysteries, but you are normally investing in future successful outcomes. Some of these outcomes e.g. successful clinical trial results or patent protection can help de-risk the investment, whereas product registration or partnerships can lead to significant revenue streams. The challenge is to find an appropriate valuation that factors in the potential risks and potential future returns (as well as the time value of money), while factoring in usual trading/investing behaviour, hence the reason why these are considered speculative stocks.
There is greater downside risk for biotech firms since they operate in a highly regulated environment and because outcomes are binary in nature. But shifts to the upside can be sudden and massive due to the high barriers of entry and protections afforded in markets, among many other reasons.
In terms of pricing, there are various factors that need to be taken into account. If iPPS is shown to act as a DMOAD then PAR can charge a higher price. Pricing will also be dependent on whether repeat injections are needed. However, the fact OA is not life threatening will limit the price PAR can request from payers, but the economic cost and cost to the health system also needs to be factored in since OA is currently an unmet need. It is also useful to consider the size of the market and market penetration, as well as the potential use of iPPS for other indications.
I would forget using P/E ratios to value Biotech stocks unless they already have a pipeline of registered products. Just be careful of those which are pricing in potential future returns while neglecting the risks.
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