A Look At 6 U.S. Healthcare Sector Plays

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 |  Includes: AGN, AMGN, BDX, CELG, QGEN, TMO
by: Dutch Trader

Today I ran a screen looking at which U.S. Healthcare companies have a buy rating or are even on the recommended list. Because I already devoted an article to Healthcare in the past, I skipped the Big Pharma names (Pfizer (NYSE:PFE), Bristol-Myers (NYSE:BMY), Sanofi (NYSE:SNY), Roche and others). There are enough other companies that are considered a good choice.

The demand for superior drugs and treatments, diagnostics and services, as well as high quality care in hospitals and institutions is as strong as ever. Of course there is the need to cut costs in the health care systems worldwide, so suppliers have to cut prices and costs to keep on delivering.

While drugs are mostly falling in price, new and effective drugs are still trading at a large premium to the average. Expensive R&D needs to be kept going and this reward is needed to incentive the industry to search for better drugs.

As investors look for steady and non-cyclical earnings streams the high cash flow intakes of the healthcare sector and strong balance sheets will command a premium in the current volatile and risk averse markets.

Which companies to focus on?

  • Leading biotech companies (AMGN, CELG) remain a very valuable asset and will continue to be acquired by product-poor but cash-rich big pharmaceuticals
  • Instruments (BDX, AGN) are attractive as far as they server a real need in treating the most common diseases like diabetes and heart disease
  • Diagnostics (NASDAQ:QGEN) is now a great area again as DNA analyses is the new way to determine a patient's ailments and also the matching drugs and treatments
  • Scientific research and the testing of reactions and substances as well as the supplies needed here are the specialized field of companies like Thermo Fisher Scientific (NYSE:TMO)

Amgen (NASDAQ:AMGN)

Amgen presented better than expected results for Q3 2011. Existing drugs like Neulasta, Aranesp, Enbrel, Epogen (cancer, anaemia, neurology treatments) are flat in revenue growth and the new drugs based on the molecule denosumab are slow to get sales momentum going.

Prolia and Xgeva, both focus on bone density loss, with Xgeva now also tested in more cancer related settings, are high quality, effective and safe products, but the patient uptake and FDA approvals are currently a bit slow.

Meanwhile, Amgen is becoming a real cash accumulator, with its existing drugs still selling well and the company is buying back shares in an impressive way.

Last week Amgen announced a huge share buy back through a so called Dutch auction (at prices of up to $60) worth $5 bln. This is half of the $10 bln buy back programme announced recently at the presentation of results for Q3. $5 bln is about 10% of the company's market cap, $10 bln would obviously mean 20%. The $5 bln buy back was not expected to be completed before 2013 so this is quite a surprise.

To part finance this buy back and give more leverage to the very strong balance sheet, Amgen is issuing notes at low interest rates. The EPS will rise to $1.40 for 2012 because of this and make the PE fall to less than 10X. On the back of this shrinking in shares outstanding, EPS can grow by 3% in 2011 and by some 13% in 2012.

New drugs will be successful though and the transition period is marked by a high spending on R&D of 20% of revenues in 2011 and 18-20% in 2012.

Valuations / Ratios

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Dividend Yield (%) 1.31% EPS (curr. year) 5.32 USD
Price/book ratio (curr. year) 2.16 EPS (next year) 5.69 USD
ROE (prev. year) 20.88% P/E (curr. year) 10.88 USD
YoY EPS growth (curr. year) 2.11% P/E (next year) 10.17 USD
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Amgen is very cash rich, keeps on accumulating cash on solid sales for existing drugs that still have quite some patent life, but new drugs are not contributing enough yet to keep revenues growth going.

Celgene Corp. (NASDAQ:CELG)

Celgene is a biopharmaceutical company with a strong focus on the development of small molecule therapeutics to fight cancers, especially blood cancers (leukemia) and inflammatory diseases. Revlimid, Thalomid and Vidaza are the company's main products. Celgene reported strong figures for Q3 results on high demand for its blood cancer (leukemia) drug Revlimid (+ 28% to $820 mln). Overall revenues jumped by an impressive 38% to $1.21 bln.

Celgene raised its full year 2011 financial guidance. This guidance consists of the following:

  • Total revenue is expected to be between $4,800 million and $4,850 million.
  • REVLIMID sales are expected to be between $3,200 million and $3,250 million.
  • Non-GAAP diluted EPS is expected to be between $3.78 and $3.80.

Valuations / Ratios

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Dividend Yield (%) 0.00% EPS (curr. year) 3.80 USD
Price/book ratio (curr. year) 3.24 EPS (next year) 4.46 USD
ROE (prev. year) 21.33% P/E (curr. year) 16.99 USD
YoY EPS growth (curr. year) 35.71% P/E (next year) 14.49 USD
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Celgene has a strong portfolio and a very promising pipeline in the fast growing areas of cancers and specifically blood cancers. Its main product, Revlimid, will see its patent expiring in 2012, but new patents for new settings are likely. The company has also very strong balance sheet. Celgene is very internationally active and has a strong position in the nr 1 cancer market ex US: Japan., with excellent expansion opportunities in China.

Becton Dickinson (NYSE:BDX)

Results for Q3 2011 were in line with expectations at an EPS of $1.39 and sales of $2.05 bln. Guidance for 2012 is for a revenue growth of 1-3% or 2-4% when FX effects are excluded. Management believes underlying EPS growth can still reach more than 10% in 2012. Margins can continue to expand on further cost cutting and share buy backs will remain a feature.

Consensus for 2011 is now at $5.63 and for 2012 at $5.83 per share.

Valuations / Ratios

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Dividend Yield (%) 2.20% EPS (curr. year) 5.62 USD
Price/book ratio (curr. year) 3.13 EPS (next year) 5.80 USD
ROE (prev. year) 21.65% P/E (curr. year) 13.19 USD
YoY EPS growth (curr. year) 14.69% P/E (next year) 12.78 USD
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The strong balance sheet of the company as well as its high free cash flows are an attractive base but the real growth is still lacking.

Allergan (NYSE:AGN)

Allergan showed good results for Q3 2011 although the numbers missed slightly on the net level. Revenues reached $1.3 bln. Free cash flow was very high again though at over $1 bln.

The company is now raising its guidance for 2011 to $3.62 - $3.64 for EPS and to $5.3 - $5.37 bln for revenues.

New approvals for Botox in the treatment of bladder control (for patients with MS and spinal cord injuries) and in areas like epilepsy and other central nervous systems indications are concluded. Cosmetic applications are selling well and a new use of Botox, now in crow's feet around the eyes, are expected to be approved soon.

Valuations / Ratios

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Dividend Yield (%) 0.24% EPS (curr. year) 3.64 USD
Price/book ratio (curr. year) 4.72 EPS (next year) 4.23 USD
ROE (prev. year) 20.01% P/E (curr. year) 23.36 USD
YoY EPS growth (curr. year) 15.19% P/E (next year) 20.08 USD
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The wide diversification of products that are all of a lesser risk than pure pharma products makers and the trend for more use of cosmetic medical procedures as well as eye care treatments plus the high potential of increased use of Botox in treatments that concern the functioning of the nervous system makes this an attractive investment for the medium to longer term.

Patent loss is not an issue as new indications for Botox are found and eye care is a very profitable business by itself. The company is highly innovative and well managed with a very healthy balance sheet and cash flows.

Qiagen N.V. (QGEN)

Biotech diagnostics company Qiagen reported in line results for Q3 2011 with sales growth at + 5% to $289 mln. This number is impacted negatively by forex moves and M&A.For Q4 the company expects sales growth organically of some 10%. EPS beat consensus by 1 cent and guidance is now for $0.96 - $0.97 for EPS for 2011.

Valuations / Ratios

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Dividend Yield (%) 0.00% EPS (curr. year) 0.68 EUR
Price/book ratio (curr. year) 1.32 EPS (next year) 0.76 EUR
ROE (prev. year) 8.99% P/E (curr. year) 15.62 EUR
YoY EPS growth (curr. year) 0.73% P/E (next year) 13.99 EUR
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This is a stock for investors with good nerves and patience, as underlying growth and earnings are solid, the strategy is sound and financials are in good shape, but the interest for smaller biotech companies from the side of momentum investors is small currently. The market cap is not an issue at $3.4 bln but the company's business is complex especially when focusing on the new acquisitions that are in a highly technical and innovative field.

Within the biotech industry, these are very interesting moves though and adds to the value of the company longer term.

The shares remain an interesting investment in smaller biotech companies with a strong balance sheet and could be a M&A candidate.

Thermo Fisher Scientific Inc. (TMO)

Thermo Fisher saw results decline on weaker demand from academic research. EPS for 2011 is now lowered to $4.11 - $4.17 (was $4.15 - $4.25) and consensus of $4.20.

Q3 saw a 23% rise in earnings though, and this solid trend can continue in 2012. Acquisitions are now helping the bottom line as well and can continue. Share buy backs are ongoing and can be increased as well. Demand from pharma and emerging markets is healthy and will grow further.

Valuations / Ratios

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Dividend Yield (%) 0.00% EPS (curr. year) 4.14 USD
Price/book ratio (curr. year) 1.21 EPS (next year) 4.75 USD
ROE (prev. year) 9.51% P/E (curr. year) 11.79 USD
YoY EPS growth (curr. year) 15.96% P/E (next year) 10.28 USD
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Universities and state institutions in the US and in Europe are cutting budget, so academic spending will not pick up soon, but the rest of this high quality business will keep on growing as there is real demand for innovations in pharma, but also in environmental testing, industrial research etc.

This growth stock is active in a defensive area and valuation is attractive now.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.