NervGen Pharma (NGEN) has drawn fresh attention after completing a follow on public equity offering of approximately $60 million, including common shares and warrants, to fund its neuroreparative drug development programs.

The follow on offering has coincided with sharp share price pressure, with NervGen Pharma’s 1 day share price return down 43.48% and its year to date share price return down 64.63%. This comes even though the 5 year total shareholder return is up 90.83%, so recent momentum is fading after a strong longer term run.

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With NervGen Pharma trading well below its recent offering price and at a steep discount to analyst targets, the key question is whether sentiment has swung too far or if the market is already pricing in the road ahead.

Preferred Price to Book Multiple of 54.4x: Is it justified?

NervGen Pharma is currently valued at a P/B ratio of 54.4x, compared with a peer group average of 2.8x and a broader US Pharmaceuticals industry average of 2.3x, which points to a very rich premium relative to balance sheet value.

The P/B ratio compares the market value of the equity to its net asset value and is often used for companies where earnings are not yet a reliable guide, such as early stage biotech businesses with limited or no revenue and ongoing losses. In NervGen Pharma’s case, the company reports no revenue and a net loss of $41.84 million, so the market value is effectively being anchored to expectations around its drug development pipeline rather than current financial performance.

With losses widening over the past five years and forecasts indicating the company is expected to remain unprofitable and have no revenue next year, such a high P/B multiple suggests investors who are buying at recent prices are placing a lot of weight on future clinical and commercial outcomes that are not yet visible in the financials. Relative to both its direct peers and the wider sector, the current valuation stands out as expensive on this metric.

For investors who want to see what is underpinning this price tag in more detail, including how it compares with other high multiple stocks, See what the numbers say about this price — find out in our valuation breakdown.

Result: Price-to-book of 54.4x (OVERVALUED)

However, there are clear risks, including the company’s ongoing net loss of CA$41.84 million and uncertainty around the outcomes of future trials for its lead drug candidates.

Next Steps

If the tone of this update feels cautious, that is because the risks are real. Review the data now and weigh up the 5 important warning signs

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.