5 Stocks That Give You Biologic Solutions

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 |  Includes: DD, DOW, GILD, NVS, SVON
by: Dutch Trader

Biology takes over from chemistry. Science has come up with innovations that are now based on biological, living molecules rather than on non-renewable, often highly polluting and increasingly scarce fossil-based materials.

New discoveries in the workings of human, animal and plant genes, but also of enzymes, have led to a wave of solutions that will find rapid adoption and commercialization. Companies that benefit from these trends can offer attractive investment opportunities.

Nowadays it is in biological sciences where new discoveries are made. Like the chemistry discoveries one hundred years ago, new biological discoveries have the potential to completely change our way of life. As we currently see, the convergence of biology with engineering and other sciences is proving to have tremendous power to generate new scientific discoveries, new products, new markets and new high-skilled jobs. The benefits can be seen in every sector in the economy.

The different areas where the new biological technologies are being adapted are very diverse and keep growing, but so far the three areas are:

  • Pharmaceutical biotechnology - the transition from chemistry-based drugs to new drugs made from biological cells
  • Industrial biotechnology - the transition from environmental unfriendly materials to bio degradable, renewable substances
  • Agricultural biotechnology - the transition and use of increased know-how of plant genetics

Pharmaceutical biotechnology

Quite a lot of pharmaceutical companies started their corporate life as chemicals makers. German giants like Bayer and BASF but also Swiss producers like Ciba Geigy and Sandoz, now combined in the pharmaceutical Novartis (NYSE:NVS). The patent cliff will lead to more chemistry companies switching to biology.

DNA analyses has been done since the first findings in the 70's and biotech drugs have been around for decades, but only recently the industry has taken off and is becoming a hot spot in the pharmaceutical industry.'

The breakthrough was the successful sequencing of the human genome, a project concluded in 2002. Since then, much research has been done and the findings are increasingly helping the development of new powerful molecules and new diagnostic techniques.

"Personalized medicine" drugs applied and developed for specific DNA profiles, making them much more effective and to use - is the latest trend.

Biotech companies are doing very well with new studies en growing proceeds from new biological drugs. BioPharma companies, such as Sanofi Aventis but also pure biotech firms such as Amgen and Gilead Sciences (NASDAQ:GILD) are a must for every portfolio going forward.

Industrial biomaterials

Industrial application of materials produced using renewable raw materials generates new, sustainable value chains and reduces our dependency on oil and the carbon footprint of consumption.

New technologies enable us to use all kinds of plants or waste material as raw material. High quality R&D is necessary to develop these products and a company like DuPont (NYSE:DD) is leading in this field.

Future big users are the car and airplane industry, but also the consumer industry. Giants such as Coca Cola already use biogradable bottles. Coca Cola's PlantBottle™ for example is the first-ever fully recyclable PET plastic beverage bottle made partially from plants (30%).

Agricultural biotechnology

For thousands of years, humans have manipulated nature to grow the best crops and livestock, by matching together various strains of crops or animals.

Agricultural biotechnology is a set of tools and disciplines meant to modify organisms for a particular purpose. That purpose can include anything from coaxing greater yields from food crops to building in a natural resistance to certain diseases. Though there are multiple ways to accomplish this goal, the method that tends to get the most attention from the public is genetic modification.

Genes are the basic units of hereditary information. A gene is a segment of deoxyribonucleic acid (Private:DNA) that expresses a particular trait or contributes to a specific function. Genes determine everything from the color of your eyes to whether or not you are allergic to certain substances.

As we learn more about which genes affect different aspects of an organism, we can take steps to manipulate that feature or function. One way to do this is to take genetic information from one organism and introduce it into another -- even if that organism belongs to a completely different species. For example, if you found out that a particular bacterium had a resistance to a certain herbicide, you might want to lift those genes so that you could introduce them into crops. Then you could use herbicides to wipe out pest plants such as weeds while the crops remain safe.

While some people might think that changing organisms at such a fundamental level is unnatural, the truth is that we've been using a much cruder method of shaping organisms for centuries. When farmers crossbreed plants, they are engaging in a primitive form of this methodology. But with crossbreeding, all the genes of one type of organism are introduced to all the genes of the second organism. It's not precise, and it can take generations of plants before farmers arrive at the desired result.

Agricultural biotechnology lets scientists pick and choose which genes are introduced to an organism.

Highly specialized companies in the field of agricultural biotechnology are Monsanto and DuPont. But also diversified chemical makers, such as BASF and Dow Chemical (NYSE:DOW) are active and increasing their stakes in this field.

A micro company such as Senesco (SNTI.OB) is even making progress. It is forming a bridge between agricultural biotechnology and pharmaceutical biotechnology combining their plant research to working toward an effective treatment for Multiple Myeloma.

Below you will find five companies that are worthy investments going forward.

Novartis

Novartis manufacturers and sells pharmaceuticals for hypertension, fungal infections, skin conditions, arthritis, cancer, cardiovascular diseases, arteriosclerosis, etc., but also products for animal health and nutrition.

Q4 results were solid and better than expected. Both revenues and net profits for Q4 beat estimates. Operating results for Q4 were up by 72% when compared to Q4 2011. Net profit for 2012 came in at $32 billion (+4%). Revenues were -3% to $56.7 billion, mainly due to patent expirations (Diovan, Gleevec), but this was no surprise.

Management expects some 14 new drugs to reach blockbuster status (annual sales over $ 1 billion) by 2015. This is possible with the new drug Affinitor (breast cancer) now doing very well and more drugs on this molecule are now tested.

Conclusion

The shares are not expensive and dividend yield is now 3.55% for 2012. New management with CEO Jimenez is more results driven and shareholders are more a focus now.

NOVARTIS NVS P/E 17.95 EPS 3.89 Insider Own - Shs Outstand 2.71B Perf Week 1.90%
Market Cap 188.92B Forward P/E 12.44 EPS next Y 5.61 Insider Trans - Shs Float 2.17B Perf Month 6.35%
Income 9.51B PEG 3.46 EPS next Q 1.27 Inst Own 10.12% Short Float 0.18% Perf Quarter 18.32%
Sales 57.56B P/S 3.28 EPS this Y 2.94% Inst Trans 0.78% Short Ratio 2.51 Perf Half Y 15.35%
Book/sh 28.54 P/B 2.45 EPS next Y 9.14% ROA 7.96% Target Price 70 Perf Year 28.82%
Cash/sh 3 P/C 23.27 EPS next 5Y 5.18% ROE 14.09% 52W Range 51.20 - 70.24 Perf YTD 10.28%
Dividend 2.48 P/FCF 37.07 EPS past 5Y 6.79% ROI 9.90% 52W High -2.29% Beta 0.55
Dividend % 3.55% Quick Ratio 0.88 Sales past 5Y 8.13% Gross Margin 66.90% 52W Low 34.04% ATR 0.66
Current Ratio 1.16 Sales Q/Q 0.48% Oper. Margin 20.00% RSI (14) 58.85 Volatility 0.61% 0.76%
Debt/Eq 0.29 EPS Q/Q 72.46% Profit Margin 16.71% Rel Volume 1.1 Prev Close 69.81
LT Debt/Eq 0.2 Earnings 19-Apr Payout 63.44% Avg Volume 1.52M Price 68.63
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Gilead Sciences

Gilead Sciences Inc. is a biopharmaceutical company that discovers, develops and commercializes therapeutics for patients who suffer from life-threatening diseases. The company has nine marketed products and focuses its research and clinical programs on anti-infectives, including antivirals, antifungals, and antibacterials.

The company goes from strength to strength, as both the existing drugs with a strong focus on HIV, and the pipeline are developing very well. EPS for Q4 2012 came in at $0.50 with $0.48 anticipated. Revenues were $2.59 billion. All drugs did well with Stribild, the new combination or QUAD drug off to a very strong start. Two new studies were published on the new Hepatitus C vaccine based on GS 7977. Both were positive and more news is expected in Q2. Expectations are for an approval of one of the new types of vaccines by the end of 2013. Hepatitis C is a huge market with so far no cure in sight.

The recent recommendation by health authorities to use Truveda as a preventive medication for persons not having AIDS but at risk of getting it, is of high importance to Gilead. This would of course widen the users group greatly.

Conclusion

Gilead is highly cash generative and now has a cash balance of $2.5 billion. Share buy backs are frequent and enhance shareholder value further. The company is one of the strongest stories in Biotech in the pharma are right now. The shares remain attractively valued at a PE of around 15x 2013 estimates.

GILEAD SCIENCES
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GILD
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P/E 25.69 EPS 1.63 Insider Own 0.57% Shs Outstand 1.52B Perf Week 2.57%
Market Cap
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63.46B Forward P/E 15.17 EPS next Y 2.76 Insider Trans 0.12% Shs Float 1.50B Perf Month 7.00%
Income 2.59B PEG 1.29 EPS next Q 0.5 Inst Own 98.52% Short Float 3.91% Perf Quarter 12.58%
Sales 9.70B P/S 6.54 EPS this Y -7.70% Inst Trans 2.61% Short Ratio 6.19 Perf Half Y 47.78%
Book/sh 6.28 P/B 6.67 EPS next Y 35.96% ROA 13.35% Target Price 46.33 Perf Year 52.79%
Cash/sh 1.7 P/C 24.58 EPS next 5Y 19.91% ROE 31.82% 52W Range 21.90 - 43.04 Perf YTD 14.05%
Dividend - P/FCF - EPS past 5Y 14.79% ROI 16.27% 52W High -4.05% Beta 0.47
Dividend % - Quick Ratio 1.01 Sales past 5Y 18.06% Gross Margin 74.53% 52W Low 88.56% ATR 0.87
Current Ratio 1.42 Sales Q/Q 17.63% Oper. Margin 41.26% RSI (14) 59.83 Volatility 1.77% 2.14%
Debt/Eq 0 EPS Q/Q 7.34% Profit Margin 26.53% Rel Volume 0.86 Prev Close 41.88
LT Debt/Eq 0 Earnings Feb 04 AMC Payout - Avg Volume 9.50M Price 41.29
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Du Pont

E.I. du Pont de Nemours is a global chemicals and life sciences company. DuPont reported results for Q4 that beat estimates. EPS came in at 11 cents with 7 cents expected. Sales were flat at $7.33 billion ($7.25 billion expected). Star performer was the Agricultural division (mainly the Pioneer Seeds business) with a rise in sales of 18%. Guidance 2013 is an EPS between $3.85-$4.05. Revenue is guidance is $36 billion for the year.

Conclusion

Good numbers with a less gloomy outlook than published at Q3 results, which seemed far too negative at the time. European demand is still very weak but the U.S. has good momentum according to DuPont. The Agro side continues to impress with Seeds the big focus now. Management says that the U.S. planting season is starting strong, good news for the rest of the Agro sector.

The attraction of DuPont over its competitors is the technologically driven innovation that the company is pursuing. Rather than depending on the chemical cycle with its high volatility, it protects itself by many innovations (markets more than 1000 new products annually). The recent acquisition of Danisco is an example, how the company is growing in the biotechnology (enzyme) area.

With a P/E for 2013 of almost 11x consensus and a dividend yield of 3.7%, the shares are not expensive.

DuPont DD P/E 17.9 EPS 2.6 Insider Own 0.15% Shs Outstand 934.29M Perf Week -2.12%
Market Cap 43.48B Forward P/E 10.58 EPS next Y 4.4 Insider Trans 3.70% Shs Float 933.14M Perf Month -0.06%
Income 2.46B PEG 2.94 EPS next Q 1.53 Inst Own 64.41% Short Float 2.54% Perf Quarter 11.96%
Sales 35.31B P/S 1.23 EPS this Y -20.97% Inst Trans -0.91% Short Ratio 3.99 Perf Half Y -6.19%
Book/sh 10.81 P/B 4.31 EPS next Y 12.53% ROA 5.08% Target Price 52.07 Perf Year -4.53%
Cash/sh 4.72 P/C 9.87 EPS next 5Y 6.08% ROE 27.02% 52W Range 41.29 - 52.08 Perf YTD 4.40%
Dividend 1.72 P/FCF 31.81 EPS past 5Y -4.03% ROI 6.84% 52W High -11.20% Beta 1.52
Dividend % 3.70% Quick Ratio 1.02 Sales past 5Y 2.87% Gross Margin 26.45% 52W Low 12.01% ATR 0.57
Current Ratio 1.56 Sales Q/Q -1.42% Oper. Margin 8.82% RSI (14) 43.58 Volatility 1.23% 1.13%
Debt/Eq 1.16 EPS Q/Q -93.81% Profit Margin 7.06% Rel Volume 0.84 Prev Close 46.54
LT Debt/Eq 1.04 Earnings Jan 22 BMO Payout 64.41% Avg Volume 5.95M Price 46.25
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Dow Chemical

Dow Chemical (DOW) is a leading, global chemical company. The majority of the company's sales is derived from international markets and the company has about 75 joint ventures with companies located in emerging markets.

Dow reported slightly disappointing numbers for Q4 2012 with an EPS of $0.33, while $0.34 was anticipated. Sales fell by 1.3% to $13.9 billion. This number was higher than expected.

A large investment programme (worth some $4 billion) is being implemented to take advantage of cheap shale gas supplies. In general, US profitability is now fine and rising.

Europe remains a problem area with very low demand and high costs. Demand China has also been weak in Q4. According to Andrew Liveris, CEO of Dow: "The second half of 2012 saw significant deterioration in the markets we serve, particularly in China".

The CEO is positive on earnings growth in 2013 helped by the agricultural business and cheap raw materials in the U.S., plus of course cost savings effects. Five percent of the workforce is leaving and some $2.5 billion costs are cut.

Conclusion

The numbers are fine and the outlook is improving. Dow is addressing the issues of high costs in Europe by withdrawing from this market as a production centre. Chinese demand is set to grow again as production of cars, electronics and demand for plastics for packaging will keep on rising as the middle class expand.

The cost advantage Dow and other chemical makers in the US will have, will be a big positive going forward.

The PE of 11 is attractive, especially if you count in the dividend yield of 4%.

DOW CHEMICAL DOW P/E 45.2 EPS 0.7 Insider Own 0.13% Shs Outstand 1.20B Perf Week -3.42%
Market Cap 37.94B Forward P/E 10.84 EPS next Y 2.92 Insider Trans -1.89% Shs Float 1.19B Perf Month -6.39%
Income 827.00M PEG 6.83 EPS next Q 0.61 Inst Own 70.73% Short Float 1.73% Perf Quarter 15.18%
Sales 56.79B P/S 0.67 EPS this Y -65.05% Inst Trans 1.83% Short Ratio 2.7 Perf Half Y 7.51%
Book/sh 17.35 P/B 1.82 EPS next Y 23.73% ROA 1.58% Target Price 35.43 Perf Year -4.56%
Cash/sh 3.6 P/C 8.79 EPS next 5Y 6.62% ROE 4.70% 52W Range 27.18 - 34.98 Perf YTD -2.13%
Dividend 1.28 P/FCF - EPS past 5Y -24.75% ROI 1.97% 52W High -11.84% Beta 2.35
Dividend % 4.05% Quick Ratio 1.32 Sales past 5Y 1.25% Gross Margin 15.84% 52W Low 13.45% ATR 0.55
Current Ratio 2.06 Sales Q/Q -1.28% Oper. Margin 2.93% RSI (14) 31.65 Volatility 1.48% 1.51%
Debt/Eq 1.01 EPS Q/Q -3600.18% Profit Margin 1.94% Rel Volume 1.52 Prev Close 31.64
LT Debt/Eq 0.95 Earnings Jan 31 BMO Payout 175.46% Avg Volume 7.65M Price 30.84
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Senesco

A micro cap in the arena of bio is Senesco. A company that I am following since the number one Healthcare contributor on Seeking Alpha, Mr. Brian L. Wilson, came with this name in one of his articles.

It is a more speculative play, because from a fundamental view it is hard to predict when they are going to make money with their technologies. But things can go very fast, that's why I would urge you to have a look at Senesco.

The company is pursuing its own patent-protected, proprietary pathway involving eukarytic translation initiation Factor 5A (eIF5A) that its founder, Professor John Thompson, University of Waterloo, has shown to be critically important in the survival and death of normal as well as defective cells. Senesco's early collaborators have successfully employed the Senesco platform to develop plants with enhanced properties including resistance to drought, salinity and disease.

Final Note

Investing in Bio is not a fashion word anymore. Investors have many choices. From pharmaceutical names such as Novartis to more specific bio firms like Gilead Sciences.

Even industrial names like DuPont or Dow Chemical cover the bio field.

Even micro names such as Senesco are choices. The company hopes its gene regulation product SNS01-T, which was granted orphan drug status, will be a viable treatment for multiple types of cancer, but also a treatment that could be used to help fight other diseases and conditions.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GILD, DD, SNTI.OB over 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.