Over the past few weeks I have written about the biotechnology stocks in the Nasdaq 100. Here I will provide an overview and some comparisons.
The following table lists the biotechnology companies covered, stock price as of the close on September 13, 2013, market capitalization at that price, GAAP trailing 12 months of earnings, and P/E ratio based on it.
Alexion Pharmaceuticals (ALXN) has targeted rare disorders, making up for the small number of patients by charging very high prices for treatment. Solaris is approved for 2 different rare blood disorders, and costs about $400,000 per year. Solaris is in clinical trials to treat four more specific diseases. Its next drug up for approval is Asfostase Alfa, for the rare disorder hypophosphatasia. It is only in Phase II, but it could be commercialized by the end of 2014, if it gets FDA approval. Other Alexion drugs are in Phase I. Management has proven its strategy to address rare disorders is sound, and while Alexion is certainly not a cheap stock given its P/E if you look at its likely earnings in 2013-2014, but with more Solaris approvals and advancement of its pipeline it looks like it could be a star in 2015. [See my Alexion Offers Long-term Value].
Amgen (AMGN) is one of the earliest biotechnology success stories, but compared to the other companies in this lot growth has been slow these past five years. Amgen's revenue and profits derive largely from Epogen (a red blood cell production stimulator) and Enbrel, a TNF inhibitor approved to modulate immune responses in rheumatoid and psoriatic arthritis. Amgen's management has become more aggressive in developing new products, and with acquisitions, including acquiring Onyx Pharmaceuticals (ONXX). Amgen's pipeline has several Phase III candidates targeted at controlling cholesterol, melanoma, and ovarian cancer. In all 8 pipeline candidates have the potential to be sent to the FDA for approval by 2016. Given its low P/E ratio and large pipeline, Amgen has a very attractive risk versus potential EPS growth profile. This is a change for Amgen, and one that has not been adequately taken into account by analysts and investors. [See my Amgen With Onyx Pharmaceuticals: Long-Term Analysis]
Biogen Idec (BIIB) has specialized in treating Multiple Sclerosis (MS). Its newest MS therapy, Tecfidera, was approved by the FDA at the end of Q1. Plegridy, also for MS, has been submitted to the FDA and EMA. In addition the results for Eloctate for hemophilia A and Alprolix for hemophilia B have been submitted to the FDA with launches expected in 2014. Biogen also has a pipeline of 8 therapies in Phase I or II. Biogen's aggressive pursuit of growth through pipeline development has rewarded investors with extraordinary gains over the past 5 years. In the second quarter Biogen purchased the full rights to Tysabri from Elan for $3.25 billion, leaving a cash balance of just $350 million, which is low for the company. However, GAAP net income in the second quarter was $490 million, so new cash will be generated quickly. Non-GAAP EPS for the full year 2013 is guided to between $8.25 and $8.50 per share, which easily supports a short-term target of $255 and does not include the value of products deeper in the pipeline. [See my Biogen Idec - Too High Too Fast?]
Celgene (CELG) has been a specialist in multiple myeloma (MM) but has been extending its reach to other cancers through Abraxane, which in addition to its earlier approval for breast cancer was recently approved for pancreatic cancer. Phase III trials are near completion for melanoma and bladder cancer. Celgene has also been preparing to enter the anti-inflammation market with Apremilast for psoriatic arthritis, which is under FDA review with hopes for a commercial launch in 2014. Additionally over 20 compounds are in pre-clinical or clinical development, giving Celgene a very large pipeline in proportion to its current revenue. Its current high P/E is mostly due to the recent pancreatic cancer approval. [See my Celgene Up Over 100% In A Year: Still A Buy?]
Gilead Sciences (GILD) has long specialized in anti-viral therapies, mainly anti-HIV drugs. Worries about patent expirations have been mitigated by the introduction of new classes of HIV regimens. The current high P/E ratio is based on the assumption that Gilead will win the race to introduce new, more effective, oral therapies for hepatitis C. It is a fair bet, but there is competition, including from Vertex. Gilead has also successfully expanded into the pulmonary care field and has several Phase II trials underway for a variety of cancers. Gilead has the largest market cap of these companies, so it needs fairly sizable increases in revenue and earnings to grow as fast as smaller companies. An all-oral hepatitis C therapy could provide that. [See my Gilead Sciences Hepatitis C Approval May Be Factored In]
Intuitive Surgical (ISRG) makes robots that surgeons use to conduct a variety of surgical procedures. Currently it has the smallest market cap in this group, but that was not true a year ago. The stock price has taken a heavy hit following negative publicity about a few surgeries that went wrong and the ensuing lawsuits. Also, revenue growth has slowed recently. While I don't see the kind of unrealized value that is in the therapy pipelines of the other companies in this group, I expect that sometime in the next few quarters Intuitive will return to growth, its P/E will rise again (if not to prior heights) and we will see that the current price is a bargain. [See my Intuitive Surgical Market Saturation Could Be Brief]
Mylan (MYL) is a generic drug maker. Mylan is included here because of its substantial investments in modernizing and perfecting the manufacturing of generics, and its foray into making biosimilars of proprietary monoclonal antibodies and other large, bioengineered molecules. Given the need for generic therapies to keep healthcare costs under control, Mylan is well-positioned for continued growth while providing very reliable earnings and even a dividend. [See my Mylan Pursues Global Generics Dominance Strategy]
Regeneron Pharmaceuticals (REGN) has specialized in monoclonal antibody and other large-molecule therapies. There is some risk in that most of its revenue and earnings comes from a single drug, Eylea, which is used to treat macular degeneration. The rapid growth from the Eylea ramp will likely moderate, but as sales are internationalized it will likely take years to peak. Eylea looks likely to treat a variety of other indications, starting with diabetic macular edema. In Phase III Regeneron has sarilumab for rheumatoid arthritis, and alirocumab is in Phase III for cholesterol control. I like Regeneron despite its 38.7 P/E because I think only about a year of growth is built into the current price, and I like the platform's ability to produce targeted monoclonal antibodies for a variety of diseases. The current pipeline is not as broad as Amgen's or Celgene's, but it is in the same ballpark in proportion to current market capitalization. [See my Regeneron Pipeline Worth Tens Of Billions In Market Capitalization]
Vertex Pharmaceuticals (VRTX) has two specialties, hepatitis C and cystic fibrosis. It is the only member of this group that has not yet shown consistent earnings, but that is largely because its first FDA approvals are relatively recent and it is making heavy reinvestments in R&D. Vertex practically has a monopoly on cystic fibrosis biotechnology, but the current label on Kalydeco only covers about 5% of the relatively small cystic fibrosis market. Two potentiators of Kalydeco, VX-661 and VX-809, are currently in Phase II and Phase III trials respectively, with data so far looking good. If approved by the FDA these could extend Vertex therapies to address most of the cystic fibrosis population. On the other hand Incivek for hepatitis C has seen declining revenues, leading to overall declines in Vertex revenues. Vertex is in the race to produce an all-oral therapy for Hepatitis C, but is going up against Gilead and other companies. There may be multiple winners, depending on trial outcomes and how the FDA decision-making process goes, so Vertex may see a comeback in Hepatitis C. I believe Vertex has shown it can excel at drug development, and in the long run (if not acquired) will be a good stock to own. My main criticism is that its $18 billion market cap is higher than Intuitive Surgical's, and not much below Alexion's, both of which are currently considerably more profitable, and both of which also have a bright future. [Vertex Pharmaceuticals: Dog Of The Nasdaq 100 Biotechs]
There has been loose talk of a biotechnology bubble this year, mostly because several companies have had stock prices double or more in the past 12 months. However, rising prices are only a bubble if expected earnings are not rising proportionally. When I look at this group of biotechnology stocks, the prices seem more than fair. Reasonable estimates of 2014 profits indicate that if stock prices stay flat through 2014, P/Es will fall substantially. In other words, for the most part only 2014 is priced in. Pipeline therapies that will (likely) be approved in 2014 and produce revenues in 2015 are not yet priced in.
These stocks would make a bundle that would be more attractive than the stock market as a whole, and far more attractive than bonds, providing you plan to hold to 2015 or beyond. A bundle mitigates competitive risks and the risk of failure of any one particular pipeline candidate.
Choosing among these stocks, if you just want one or two, is a matter of determining what the probabilities are for future profits (from currently approved indications, label expansions, international expansion, and pipeline candidates). I like to think in terms of probability bands, i.e. 5% chance of disaster, 25% chance of profits flattening, 50% chance of pipelines being mostly approved, 20% of all pipeline drugs approved and commercial revenues exceeding baseline expectations.
Each company offers something unique; the only common denominators are revenue and profits. I already own Gilead, Celgene, and Biogen Idec, but that does not mean I would necessarily pick those three if I were picking three of the nine now. Given what I already own, for me Mylan and Intuitive Surgical would be best for diversification, since my current companies are creators of novel therapies, while Mylan is expanding in generics and Intuitive does not deal in pharmaceuticals at all.
How much risk is in a stock is a judgment call. As we saw this year with Intuitive Surgical, investors can assume there is little risk in a high P/E stock, and be wrong. But the drop in ISRG's stock price has lowered the risk. Taking into account stock price, execution risk, and my feel for the pipelines of the various companies, my rule-of-thumb take on risk sorts these companies into the following order, (from least to most risky): Amgen, Intuitive Surgical, Mylan, Celgene, Biogen, Regeneron, Alexion, Gilead, and Vertex.
In fact, I may pick no new stocks from this group. Next in this series I will be looking at some smaller capitalization biotechnology companies, many that do not yet have a product commercialized, to see if any have risk versus potential-profit profiles that appeal to me more than the stocks discussed above.
Additional disclosure: I will not initiate new positions in any of the stocks discussed for 72 hours.