I'm just guessing that it's the same reason repairs of many devices and appliances cost a large proportion of the original price. When a gadget is manufactured, it is done on a highly automated assembly line where many devices are assembled quickly mostly by robots.
When you do a repair, a single device must be partially disassembled which probably involves a human, at human labor rates. The smaller the device, the harder it is to take apart and put back together since there just isn't room for easy fasteners like big screws. The Apple Watch is very small, so it's almost a worst-case scenario for a repair, especially if adhesives are used to attach the case and/or screen.
I decided to do a Google search on how much it would cost to replace the face on a traditional, non-electronic watch. The prices went from $30 for acrylic, to $150+ for sapphire, to $500-800 to replace a Rolex crystal face. Against that, the Apple Watch screen repair price isn't unusual and seems to fit right into that traditional price structure.