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Introduction

There are many articles on Seeking Alpha on the biotechnology companies -- Vivus Inc. (NASDAQ:VVUS), Amgen Inc. (NASDAQ:AMGN), Novo Nordisk A/S (NYSE:NVO), Gilead Sciences Inc. (NASDAQ:GILD) and Celgene Corporation (NASDAQ:CELG). They have a very similar story to tell. They are selling at relative price multiples that are below or close to the industry average. However, the more important question is which is the best bargain among the five stocks? There is limited analysis comparing the biotechnology companies on similar parameters, even though many analysts are making separate arguments built along the same lines.

In this article, we will look at some valuation measures, historical performance indicators, and forward growth estimates to see if we can determine which of these companies could be a profitable investment in 2013.

Tracking Financials

Here are the numbers for the five companies for our analysis:

Indicators

Vivus

Amgen

Novo Nordisk

Gilead Sciences

Celgene

Market Cap

$1.4 bil

$64.6 bil

$96.9bil

$64.1 bil

$48.18 bil

Price/Earnings

N/A

15.0

26.6

25.9

27.4

Price/Sales

--

4.0

7.2

6.9

8.2

Price/Book

4.9

3.2

15.0

7.3

7.3

Forward P/E

-32.4

10.22

17.9

14.5

14.8

5 Year Growth Forecast

--

9.4%

14.2%

17.1%

22.3%

Dividend Yield

--

1.84%

1.06%

--

--

ROE

-44.6%

20.7%

57.3%

33.89%

28.29%

Operating Margin

--

33.6%

32.22%

40.48%

34.25%

Debt/Equity

--

1.21

0.01

0.82

0.48

Current Price

$13.46

$84.13

$173.00

$42.28

$100.45

Estimated Fair Value Range

N/A

$94-$120

$147-$160

$36-$43

N/A

Current Stock Valuation

N/A

Undervalued

Overvalued

Fairly Valued

N/A

Upside Potential/Premium over the Fair Stock Value

N/A

12%

8%

--

N/A

Data from Morningstar on February 20, 2013

The discounted earnings plus equity model, developed by EFS Investment Partners and applied to the competitors, suggests that currently Amgen's stock is undervalued, Novo Nordisk's stock is overvalued, and Gilead Sciences' stock is fairly valued. In addition, EFS' fair stock price valuation indicates that currently Amgen is trading at least 12% upside potential to reach its fair value, whereas Novo Nordisk is trading at least 8% premium over its fair value.

What Does 2013 Have in Store for Biotechnology Companies?

What is the difference between a pharmaceutical company like Pfizer (NYSE:PFE) and a biotechnology company like Amgen? Decades ago pharmaceuticals primarily worked with plant and chemical compounds while biotechnology companies worked with the genetics of living organisms. Over time some biotechs grew to "mature" companies turning a profit from earlier status as unprofitable "start-ups" or "rising stars." A recently released research report from MP Advisors entitled Pharmaceutical Market & Biotechnology Industry 2013 Outlook makes the interesting observation that over the next five years the distinctions between big pharma and mature biotechs is likely to disappear. The report is optimistic about prospects for biotech companies in 2013, noting the sector's impressive performance in 2012. The Nasdaq Biotech Index was up 31.9% in 2012. Here is the impressive chart:


(Click to enlarge)

Vivus is the only company in the table that does not qualify as a "mature" biotech as it has yet to show a profit. Based on traditional valuation metrics like P/E and Forward P/E one would be hard pressed to find a reason to like Vivus. However, for risk tolerant investors, there are two very good reasons - the potential of two drugs, Qysmia and Stendra.

Vivus was the first out of the gate with an FDA approved obesity drug, Qysmia. Initial sales were disappointing but the latest numbers have improved, according to a recent company SEC filing. Vivus faces future competition from Arena Pharmaceuticals (NASDAQ:ARNA) and Orexigen Therapeutics (NASDAQ:OREX). In May of 2012 the FDA approved a new entry into the erectile dysfunction market from Vivus called Stendra. This is another reason to like Vivus. The drug is billed as the fastest on the market, achieving results in as little as 15 minutes. Another study on the effectiveness of Qysmia released on February 1, 2013 showed the drug has positive effects on cholesterol, blood pressure and triglycerides levels.

Amgen has been around since 1980 and according to the company was the first to introduce "blockbuster" drugs derived from the company's innovations in both recombinant DNA and molecular biology research. Amgen is now the largest biotechnology company in the world with a strong pipeline including 43 candidates in various stages of the FDA approval process. The company has a solid track record of earnings growth, with EPS on an upward trajectory over the last decade, rising from $1.69 EPS in FY 2003 to $4.04 in FY 2011.

Amgen pays a respectable dividend at 1.9% yield and company management is committed to dividend growth. In an early 2013 Investor presentation Amgen outlined ambitious plans for growth in biosimilar products in the oncology niche. The FDA defines Biosimilars as products similar to existing approved biologic treatments with no significant difference in terms of safety, purity, and potency.

Novo Nordisk dropped 14% on February 11, 2013 in response to the FDA request for more testing on some of the company's latest insulin treatments in the approval pipeline. Company management stated the requests could not be completed this year but the delay would have no impact on financial results for the fiscal year.

Novo Nordisk is a Danish company with operating segments in insulin products and biopharmaceuticals. The company has more than tripled earnings per share since 2002, moving from DKK 11.72 per share in 2002 to DKK 35.965 on a trailing twelve month basis in early 2013.

The company already has dominant market share in insulin products with 27% share as of FY 2011. An analysis from Societe Generale (OTCPK:SCGLY) predicts the FDA action could delay bringing the new drugs to market by three to five years.

Gilead Sciences develops treatments for infectious diseases, most notably HIV/AIDS. The company's acquisition strategy led to entry into treatments for major liver diseases like hepatitis B and C. Gilead is a great example of why investors love biotech stocks as the company's attempts to expand have already paid off for shareholders. On November 12, 2012 Gilead released positive results for one of its hepatitis C drugs and the share price has not looked back since. Here is a six month share price chart from Yahoo Finance showing the move:


(Click to enlarge)

Celgene has the most impressive 5 year growth forecast of any stock in our table showing a healthy 22.3%. The company's primary focus is on treatment of cancer and related diseases. The optimistic analyst growth forecasts were supported by company management on January 7, 2013 in an all positive outlook for 2013. At the end of January the company reported 2012 results including a 14% year over year increase in revenue and a 16% increase in earnings per share.

The company's blockbuster cancer drug Revlimid recently got approval for introduction into China. Revlimid generates about 70% of Celgene's total revenue. Investors concerned about the dominance of a single drug in a company's portfolio should be encouraged by the revenue growth potential in the Chinese market.

Final Verdict

Investors with high risk tolerance would do well to keep their eyes on Vivus, at a minimum. It is the only stock in our analysis with the potential to morph into a big player. There are significant risks involved with the company's products Qysmia and Stendra. But as you know, great rewards often require great risks. The company's share price has dropped dramatically since the speculative frenzy of the first half of 2012. Watch sales figures for both Stendra and Qysmia and insurance approvals for Qysmia.

Bargain hunters might want to take a serious look at Novo Nordisk, a solid company in no long-term danger from the recent FDA setback. The remaining three are all solid companies, each with their own attractive growth prospects. However, Gilead has the potential for a big breakthrough with its hepatitis C treatments.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Too Many Biotechnology Bargains: Which Is The Best Bet For 2013?