Recent analyst upgrades for Relay Therapeutics (RLAY) focus on early clinical data for its drug candidate zovegalisib. Initial results in PIK3CA-driven vascular anomalies, particularly in heavily treated patients, have drawn increased attention to the stock.

The recent enthusiasm around zovegalisib comes on top of strong price momentum, with a 1-month share price return of 21.39%, a 3-month share price return of 46.20% and a year-to-date share price return of 81.05%. The 1-year total shareholder return is about 4.6x, while longer-term total shareholder returns have been more mixed.

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With analyst optimism around zovegalisib, a 1-year total return of about 4.6x and the stock trading below the average analyst price target, you now face the key question: is there still a buying opportunity here, or is future growth already priced in?

Preferred Price to Book of 5x: Is It Justified?

Relay Therapeutics currently trades on a P/B of around 5x, which sits above both its closest peer group and the wider US biotech sector. With the last close at $14.81 and analysts’ average price target at $24.82, the market is clearly attaching a premium valuation to the stock.

P/B compares the market value of a company to its net assets on the balance sheet. For early stage biotechs that are still loss making, investors often look at P/B because traditional earnings based measures such as P/E are not meaningful. A higher P/B can reflect expectations that the current R&D pipeline and intellectual property could produce future revenue that is not yet visible in today’s financials.

In Relay Therapeutics’ case, this premium is visible in two ways. The company is described as expensive relative to a peer average P/B of 4.5x, and it also screens as expensive versus the broader US Biotechs industry average P/B of 2.4x. Put simply, the market is paying more for each dollar of book value than it is for many other biotechs, which suggests investors are already pricing in a meaningful degree of future success for its clinical pipeline and precision medicines platform.

Against that backdrop, the P/B of 5x stands out as materially higher than both direct peers and the sector, rather than sitting in line with them. For investors weighing up Relay Therapeutics against other biotech stocks, this relative premium is an important part of the trade off between perceived pipeline potential and valuation.

Result: Price to book ratio of 5x (OVERVALUED)

However, recent gains come after a history of mixed longer term returns, and the company is still reporting a net loss of about $272.7 million a year.

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Next Steps

If this mix of optimism and caution around Relay Therapeutics resonates with you, now is a good time to review the numbers yourself and decide where you stand. To help frame both sides of the debate, take a close look at the 2 key rewards and 2 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.