The biotech industry is highly speculative and offers enormous returns to its investors on favorable occasions. The main aspects to consider when investing in a biotech company are the new products in its pipeline and their respective markets. I would not recommend a long-term (i.e., more than 12 months) investments in biotech as any new product in the pipeline can have a significant impact on the company's stock. My suggestion is to treat these companies as speculations in order to be the first to identify any positive news that can hike the stock price. This article analyzes the major stock moving events regarding Arena (ARNA), Roche Holdings (RHHBY.OB), and Amgen (AMGN), as well as suggests an investment position on these companies, taking recent events into account.
To be successful, biotech companies must make one of their products a success in the market. This fact is dependent on the market the product serves, existing competition in the market, first-come advantage, and the time it takes to receive FDA approval (in the U.S.). Let's take a look at the prospects for each of these three companies.
Tracking Recent Events and Financials of These Names
1. Arena is in the process of introducing its anti-obesity drug Belviq and is waiting for the DEA review prior to launching and marketing its product in U.S. This process has taken an unexpectedly long time and the matter is still pending. The EMA committee raised issues against this product as it produced chronic side effects in laboratory rats. This notice gave rise to enormous negative sentiments in the market and, as a result, almost 26% of the Arena float was shorted by the investors. Investors were left with no hope for Belviq, which was quite prominently reflected in the stock price of Arena.
This whole event has made Arena a highly speculative investment. The stock is trading at about $8.50 and its fate is still to be decided. If Arena gets approval for Belviq and launches this new product, it will have a huge impact on the share price of Arena. The price-hike effect will be coming from two dimensions: the stock appreciation due to positive investor sentiments, and the price hike that will stem from short sellers buying Arena to close their short positions. The combined effect of investor confidence and 26% of the float being purchased is unimaginable. Additionally, Arena is expected to receive $5.0 million from its marketing partner upon receiving a DEA designation and another $60 million upon Belviq's launch. This $65 million cash influx will be further supported by the royalties Arena will receive for Belviq. Arena's CFO expects royalties in excess of $300 million for the first $1.0 billion in total sales.
On the other hand, if the matter does not proceed as stated above, the stock will plunge down to the pits. Investors will be afraid to be bullish on the stock and the existing short positions will benefit. New short positions will also be taken, further pressuring down the price.
2. Roche Holdings is the world's largest cancer drugmaker and Roche's cancer drugs are considered among the best cancer drugs in the world. Three of its drugs were called the best-selling cancer drugs in 2011, and in 2012 five of the top 10 selling cancer drugs were sold by the Swiss giant.
Regarding its annual results for 2012, the company posted sales growth of 4%, EPS growth of 10%, and a dividend increase of 8%. Positive developments in its pipeline projects and good earnings and growth prospects have trickled down to its stock price, as the stock is trading close to its 52-week high. The year 2012 was a good year for the company, and there is a cause for optimism for 2013.
As Roche's CEO Severin Schwan said:
2012 was a very good year for Roche. We met our financial targets, grew faster than the market, and our strong pipeline positions us well for further growth. A particular highlight in 2012 was the approval of breast cancer medicine Perjeta, which helps women with HER2-positive breast cancer live longer. We now look forward to getting T-DM1, our other novel breast cancer therapy, to patients as soon as possible.
T-DMI is expected to be approved by the FDA in mid-2013. This will be another revenue-boosting event for the company. Most of Roche's promising drugs are in the oncology division, where the company does not face much competition.
Click to enlarge image.
3. Amgen is a giant of the kidney dialysis market and, as a result, has a monopolistic control over this market. Amgen reigns over 95% of the market and has profited substantially from this beneficial market positioning. Affymax was expected to snatch the market away from Amgen, but with the possibility of a permanent shut down of Affymax some investors have piled on the shares of AMGN, whose stock price gained about 9%. The Omontys recall might not have a material impact on Affymax earnings, but Amgen's place was restored due to this recent event. Most analysts estimate that Amgen will see an incremental 3% increase in 2013 EPS as this drug will be the only available treatment for the disease.
As additional perks for its investors, Amgen is utilizing buy backs and making a new commitment to dividends, as evidenced by CFO Jon Peacock's commitment to a payout ratio of at least 60%.
Key Ratio Analysis
Dividend Yield %
By analyzing the valuation ratios of ARNA, RHHBY and AMGN, we can observe that Roche has the highest dividend yield at 3.3%. This is higher than its peers and the S&P 500. In addition, Roche has the lowest price-to-cash-flow multiple and price-to-sales multiple.
Forward Looking Valuation
PEG Ratio Five-Year Expected
Rev Growth (Three-Year Average)
EPS Growth (Three-Year Average)
Operating Margin % TTM
Net Margin % TTM
Roche has a return on equity of 66.2%, a net margin of 21%, and an operating margin of 31% -- these metrics are quite decent.
From a short-term perspective, Roche is well-positioned compared to its peers and promises growth potential for 2013. For investors, its friendly dividend policy, strong market position, and exceptional growth prospects make Roche a buy in my books.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.