In 5 Biotechnology Bargains with Attractive Fundamentals I discussed the five least expensive biotechs that were chosen by my PIC criteria. As I mentioned in that article, the set of filters used on FINVIZ.com's screener returned 15 companies, all of which exhibited what would constitute a minimal set of fundamental data indicating they were efficient and effectively run.
In this article I have selected the five companies from that collection that have displayed significant growth in revenues, either consistently over the past 4+ years or by a recent substantial increase that appears sustainable.
The Selection Process
These are the criteria used:
- Sector: Healthcare
- Industry: Biotechnology
- Return on Assets > 0
- Return on Equity > 0
- Return on Investment > 0
- Quick Ratio > 1
- Long-Term Debt/Equity < 1
- Total Debt/Equity < 1
- Operating Margin > 15%
- Payout Ratio < 100%
- Performance (TTM) > 0
For those not familiar with my PIC (Potential Investment Candidate) criteria, they are designed to identify companies with effective management (indicated by the three return data), adequate liquidity (quick ratio), minimal debt (debt/equity data), efficient operations (operating margin), and - for those companies paying dividends - adequate earnings to pay dividends (payout ratio); performance, while not a fundamental datum, is included to weed out companies that have lost value over the past year.
The ranking process was based on how the selectees rated on each of the nine selection criteria; their market cap and EPS (descending order); and their P/E, P/S, and P/B (ascending order). The lower the score a company received, the more highly ranked it was. Rounding out the top ten biotechnology firms are (ranking is presented in brackets, clicking on the company name will take you to its website):
- Questcor Pharmaceuticals, Inc. (QCOR) ;
- Jazz Pharmaceuticals PLC (JAZZ) ;
- Regeneron Pharmaceuticals, Inc. (REGN) ;
- Celgene Corporation (CELG) ;
- Alexion Pharmaceuticals, Inc. (ALXN) .
Questcor has focused its attention on one product: H.P. Acthar Gel - a naturally derived formulation of adrenocorticotropic hormones. The drug is used to treat disorders in the autoimmune system, as well as inflammatory disorders. Acthar is approved for 19 indications falling in the general areas of:
- Multiple Sclerosis Relapses;
- Infantile Spasms;
- Proteinuria in Nephrotic Syndrome;
- Dermatomyositis and Polymyositis.
Questcor's research has been devoted to extending the applicability of Acthar; indeed, while Acthar was first approved by the FDA in 1952, it would be 58 years before the drug was approved for the treatment of infantile spasms. Those efforts continue in the areas of neurology, nephrology and rheumatology. Questcor also provides patient support through A.S.A.P. (Acthar Support & Access Program), which provides condition-specific services, injection training materials, and financial assistance for qualified patients.
The company's determined efforts to expand the range of conditions treatable by Acthar earned Questcor the No. 1 ranking in Forbes' 2011 Top 20 Small Public Companies in America.
Questcor's revenues have increased significantly in each of the past four years; through September 30, its 2013 revenues have already exceeded that of 2012, as shown below [note: figures for 2013* reflect revenues through September 30]:
Questcor is also one of only two companies on the list of biotechs that pays a dividend; they are currently paying $1.00/share annually, with a dividend cover of more than 436% (dividend cover is the inverse of payout ratio, and is calculated by dividing EPS by annual dividend; a cover of more than 100% is desirable). Its EBIT margin indicates an efficient operation, while its returns speak to an effective management. The company's P/E seems low compared to the industry average of 68, indicating that it is not overbought.
Founded in 2003, Jazz has established itself as major biopharmaceutical firm, providing treatments in oncology, psychiatry, as well as treatments for pain and narcolepsy. The company is headquartered in Dublin, Ireland, with offices in Palo Alto, CA, and Philadelphia, PA.; in June, 2012, it acquired EUSA Pharma, a biopharmaceutical firm based in Ireland.
Jazz currently has ten products on the market:
- Xyrem (for narcolepsy);
- Erwinaze, Quadramet, Caphosol, and ProstaScint (for cancer and associated conditions);
- FazaClo, LuvoxCR and Niravam (for psychiatric conditions);
- Prialt (for pain);
- Parcopa (for Parkinson's disease).
The company also has the following drugs in its pipeline:
- Erwinaze/Erwinase (exploring additional labeling opportunities);
- Leukotac (Phase III study, EU only);
- Asparec (Phase I, EU);
- Clozapine (FDA approval sought; exploring extensions).
A mid-cap-sized company, Jazz's P/E indicates that it is not overbought. It has an acceptable level of debt and more than adequate liquidity. As with Questcor, Jazz has managed to grow its revenues quite handsomely, as indicated below (note: 2013* figures through June 30):
On the basis of its revenues for the first half of 2013, Jazz should handily surpass its 2012 revenue figures.
Founded in 1988, Regeneron developed its facilities through strategic alliances and collaborations with established pharmaceutical firms: Amgen (AMGN), 1990; Procter & Gamble (PG), 1996; Aventis [later merged with Sanofi ADS (SNY)], 2004 and 2007; and Bayer Healthcare [subsidiary of Bayer AG (OTCPK:BAYZF)], 2005. The company's first drug to be approved by the FDA was ARCALYST, in 2008. It now has three products on the market:
- ARCALYST, for Cryopyrin-Associated Periodic Syndromes ("CAPS" - a rare hereditary condition);
- EYLEA, for neovascular Age-related Macular Degeneration ("AMD");
- ZALTRAP, for metastatic colorectal cancer (mCRC).
In addition, Regeneron has 14 drugs in their pipeline:
- Phase III: EYLEA (for additional ophthalmic indications), Sarilumab (rheumatoid arthritis) and Alirocumab (cholesterol control);
- Phase II: Fasinumab (osteoarthritis), Dupilumab (asthma, dermatitis), and Sarilumab (uveitis);
- Phase I: Enoticumab, Nesvacumab and REGN1400 (advanced malignancies), and REGN1033 (metabolic disorders);
- Four undisclosed drugs are in early stages of development.
A large-cap company, Regeneron appears to be effectively managed and efficiently operated. Although its shares are priced at the top of the companies being considered, it does not appear to be overbought.
The company's revenues - particularly for 2012 and thus far in 2013 - are impressive (note: revenues for 2013* include 3Q figures released on November 5, 2013):
Most noteworthy is the observation that revenues for the first three quarters of 2013 already surpass the lofty revenues for the entirety of 2012, which more than tripled the revenues of 2011.
Celgene has based its success on innovation in research and development, ultimately owning or licensing over 800 pending or issued patents. It has grown its business through the acquisition of no fewer than six biotechnology companies: Signal Pharmaceuticals (2000), Anthrogenesis (2003), Pharmion (2008), Gloucester Pharmaceuticals (2010), Abraxis BioScience (2010) and Avila Therapeutics (2012). The company markets six products:
- Abraxane: for pancreatic, breast and lung cancers;
- Istodax: for T-cell lymphoma ("TCL");
- Pomalyst: for multiple myeloma ("MM");
- Revlimid: for mantle-cell lymphoma ("MCL"), MM and anemia;
- Thalomid: for MM and erythema nodosum leprosum;
- Vidaza: for myelodysplastic syndromes ("MDS").
All of Celgene's products are undergoing clinical trials for additional indications. In addition, it has the following drugs in its pipeline:
- MM: Imnovid (awaiting FDA approval);
- MDS, Acute Myeloid Leukemia ("AML") and Solid Tumors: CC-486 (Phases I - III);
- AML: DOT 1L Inhibitor EPZ-5676 (Phase I);
- Lymphoma and Chronic Lymphocytic Leukemia: Btk Inhibitor CC-292 (Phase I);
- Anemias: Sotatercept (Phase II) and ACE-536 (Phase II);
- Solid Tumors: CC-223, CC-115, and CC-122;
- Anti-Inflammatory: Apremilast (phase 3, awaiting approval), Pomalidomide (Phase II), CC-11050 (Phase III), CC-220 (Phase I);
- Crohn's disease: PDA-001 (Phase I);
- Transplants: UCB + HPDSC (Phase I);
- Cellular therapies: PDA-002 (preclinical).
Celgene has amassed a body of chemical products that has enabled it to generate revenues that have grown both substantially and consistently over the past five years. Unlike the three companies discussed earlier, Celgene has not realized an "explosion" of revenue - just a regular, large, growth, as shown in the graph below (note: the figure for 2013* is based on the first three quarters):
Celgene is projecting 2013 revenues to exceed $6,200 million. Inasmuch as the company's quarterly revenues have grown by an approximate average of 5% from quarter to quarter, its total for 2013 could be near to $6,500 million. Such a persistent level of growth is a testament to the company's commitment to product development.
Given the company's Price/Earnings and Price/Book, one could make the case that Celgene is close to being overbought. The company ranked fairly low (nr. 12) among the 15 candidates selected because it settled toward the bottom of the rankings for returns and EBIT margin, as well as for P/E and P/B.
To date, Alexion Pharmaceuticals has progressed along the same path as Questcor - its success has been due to the development of a single drug: Soliris; more generally, the company is committed to developing treatments for "severe and ultra-rare disorders." Founded in 1992, Alexion is headquartered in Connecticut, with its principal manufacturing facilities in Rhode Island. It maintains global operations through its offices in Switzerland.
Soliris (eculizumab) is a drug that has been approved in the U.S. and overseas for the treatment of paroxysmal nocturnal hemoglobinuria (PNH) and atypical hemolytic uremic syndrome (aHUS); it is currently in clinical trials for other nephrologic, neurological and transplant indications.
While Questcor is satisfied to focus on H.P. Acthar Gel for the foreseeable future, however, Alexion has stocked its pipeline with four other candidates:
- Asfotase Alfa - for hypophosphatasia;
- ALXN1101 - for molybdenum cofactor deficiency;
- ALXN1107 and ALXN 1102/1103 - for inflammatory disorders.
Asfotase Alfa is currently in the "registration studies" stage of development, while the other candidates are in early clinical studies. Alexion also has a portfolio of projects that are currently in the preclinical phase.
Over the past five years Alexion has grown its revenues much as Celgene has, with substantial growth occurring every year; the difference is, Alexion's growth has been on the order of 40% or more per year (note: 2013 figure includes data from the first three quarters only):
The company is projecting 2013 revenues in the range of $1.535 billion to $1.540 billion, the high end falling just short of a 40% increase over 2012 revenues.
Alexion ranked 14th of the 15 companies selected by the PIC filters - by and large because it does not stand out in any particular category. Its P/E is rather high, indicating that the company may be overbought, but with its revenues growing at a high rate, the P/E may drop of its own accord.
The last point above may well apply to all five of the companies discussed here: given the substantial growth of revenues, earnings are likely to catch up to share price sooner, rather than later, bringing their P/Es down of their own accord. At any rate, shareholder enthusiasm for these companies seems to be well founded.
What is disappointing, however, is that only one of the companies - Questcor - offers a dividend. Of course, few biotechnology firms do pay dividends, but companies that are realizing such substantial revenues as these five should be giving their shareholders some value in return for their faith.
All data drawn from 10-K and 10-Q filings. Share price histories courtesy of Google finance. This article is not a recommendation to invest in any of the companies mentioned; it is intended for informational purposes only. Investors should be careful to conduct their own due diligence when considering an investment.