By Douglas Ehrman
One of the unexpected results of the financial crisis of 2008 is that certain sectors of the market that were once hot, grabbing headlines, and the focus of potential government funding have fallen out of favor. Biotechnology is one such sector that has become a quiet segment at best, and lost the spotlight to new banking regulations, sovereign debt defaults and the new-found need for attention grabbed by the Federal Reserve. The result of this shift in attention is that some of the most solid names in that sector have become significantly undervalued and present solid investment opportunities to those willing to do some research and venture back in to these names.
Oncothyreon, Inc. (ONTY) – With a 52-week range on the stock between $3 per share and $12, the stock has plenty of upside potential, even within its current range. Most importantly, ONTY is in late stage trials of its drug Stimuvax, the company’s innovative cancer vaccine. The trials are set to conclude sometime next year, and if successful, the growth story here is likely to be significant. The stock qualifies as a good value in the sense that the upside potential is so dramatically larger than the downside risk, on a risk-adjusted basis, the stock looks cheap. It is important to understand, however, that if the trials are concluded with a negative result, it will seriously affect the stock’s price.
Amgen, Inc. (AMGN) – Right out of the box, AMGN is a great value as a biotech stock that is offering a dividend yield of 2.1% at current levels. This essential matches the rates available on U.S. treasuries from a company that has significant upside potential. The company has been able to maintain significant levels of profitability by keeping costs down, and still has a solid pipeline of new drugs expected to come online soon – many which should rival those that will come off patent in coming years. When compared to rivals in the pharmaceutical space – Johnson & Johnson (JNJ), Novartis (NVS) and Sanofi-Aventis (SNY) – the company is in line in terms of price-to-earnings ratio, but superior when growth is added and on an operating margin basis. The figures are as follows: the price-to-earnings ratios are 11.1 for AMGN, 15 for JNJ, 12.7 for NVS and 14.3 for SNY; the price-to-earnings over growth (PEG) ratios are 1.4 for AMGN, 2.3 for JNJ, 2.1 for NVS and 41.3 for SNY; the operating margins are 34.9% for AMGN, 26% for JNJ, 22.8% for NVS and 22.2% for SNY. On these metrics, AMGN stands out as a great value, particular given how well the company is positioned for the future.
Gilead Sciences, Inc. (GILD) – The numbers tell complete story for this stock, placing it well ahead of several of its closest competitors. Where Bristol-Meyers Squibb Company (BMY) is trading at a trailing price-to-earnings ratio of 15, and GlaxoSmithKline (GSK) is trading at a trailing price-to-earnings ratio of 20.2, GILD is trading at 11.2. Introducing the growth element and considering the price-to-earnings over growth ratio, eliminates BMY at 48.7 relative to GILD at 0.65 and GSK at 0.67. The final piece of the puzzle is the operating margins; where GSK has an impressive operating margin of 39.9%, GILD is even more impressive at 48.8%. Given these numbers, GILD appears to be a good value at current levels.
Biogen Idec, Inc.. (BIIB) – Of all of the companies on this list, the argument of many analysts that BIIB is fairly priced at current levels based on limited upside and only a few drugs in the pipeline. The other side of this argument, however, is that the one class of drugs in which BIIB is the clear leader in the industry is for MS therapies. If these drugs pan out as expected, they have the potential to be major blockbusters and drive earnings for the company for years. It is based on this substantial upside potential, coupled with solid operating performance in the interim, that allows BIIB to make the list of undervalued biotech stocks. As an additional catalyst for the stock, it recently received an upgrade from UBS (UBS) to Buy from Neutral. Increased investor attention may be sufficient to jump start the stock, or at least get investors considering it again as a stronger portfolio candidate.
Dendreon Corp. (DNDN) – DNDN has followed an interesting path over the past several years, recently being severely punished for an earnings miss, and, more specifically, its lack of guidance heading into the latter half of the year. This news drove the stock price from the mid $30’s to under $10 per share overnight. Unlike many companies in its position, DNDN did not partner with a major pharmaceutical company to fund its research. After choosing to go it alone, DNDN received FDA approval and the stock rallied. Next the company was able to receive approval to get the drug covered by Medicare. This led to another jump in the stock’s price. Overall, the company’s management has demonstrated an ability to handle the science end of their business quite well. Where the company has struggled is in sales, doing a poor job of educating doctors to the benefits of the drug and getting it prescribed as much as it should have been. If the company can solve this issue, and drive sales to be in line with reasonable expectations, the stock represents a significant value.
Vanda Pharmaceuticals, Inc. (VNDA) – The value in this company is purely in its growth prospects. Trading near its 52-week low, and having missed earnings in a release in early August, this may be an excellent buying opportunity if the company is able to turn itself around. Furthermore, given the attractiveness of its lead drug in the effective treatment of schizophrenia, the company may become an acquisition target. With a microcap market capitalization and average daily trading volume around 150,000 shares per day, investors should take care in this name.