For decades, biotech companies have lured investors with the promise of enormous returns. Everyone wants to invest in the next Amgen (AMGN), not the next Orexigen (OREX). Yet, biotech companies face unique risks that do not affect any other industry. A single drug trial can change everything for a biotech company. They are the ultimate high-risk, high-reward play.
In volatile markets like these, companies perceived as risky will always be sold off first, no matter how far removed they are from Europe's debt crisis or perceptions of a weak American economy. Biotech firms top that list. At Helix Investment Management, we like companies with solid growth potential. Yet current market conditions do not favor high growth companies such as biotechs. That is why investors must look for other ways to access growth. We have found such a way to access the biotech sector, through its cousin, big pharma.
Multinational pharmaceutical companies are known for both stability and risk. They are stable dividend payers, growing earnings and payouts slowly but surely, year after year. And yet, they are engaged in a perpetual race against the clock to mitigate the effects of the next patent to fall off the cliff. The most recent high profile patent expiration occurred with Lipitor, Pfizer's (PFE) most successful drug. Pharmaceutical companies must constantly invest in new drugs, hoping that by throwing many drug candidates against the wall, a few will stick. Yet not all pharmaceutical companies are created the same. Today we would like to highlight to standouts in this sector, Bristol-Myers Squibb (BMY) and Sanofi (SNY). These two companies have outstanding pipelines that rival those of traditional biotechs in their breadth and potential. Below is an overview of these 2 companies.
|Company||Bristol-Myers Squibb (BMY)||Sanofi (SNY)|
|Stock Price (12/1/11)||$32.90||$35.07|
|2011 Estimated EPS||$2.29||$4.96|
|2012 Estimated EPS||$2.02||$4.37|
|2011 Estimated Revenue||$21.2 Billion||$47.3 Billion|
|2012 Estimated Revenue||$18.2 Billion||$49.0 Billion|
|Cash||$11.012 Billion||$6.538 Billion (Euros)|
|Debt||$5.619 Billion||$13.289 Billion (Euros)|
|Net Cash||$5.393 Billion||-$6.751 Billion (Euros)|
Year-to-date, both stocks have outperformed the S&P 500. Sanofi is up almost 9% while Bristol-Myers is up over 24%, and we think both companies have more room to run
For Bristol-Myers, there are a number of catalysts going forward. Its BioPharma strategy, as CEO Lamberto Andreotti calls it, allows the company to deliver results today while laying the foundation for a solid future. Bristol-Myers is in transition, which is why earnings and revenues are expected to fall in 2012. The blood thinner Plavix, the company's top seller, is expected to lose exclusivity in the US in 2012, and Abilify, its leading antipsychotic will lose exclusivity in 2015. The company faces a patent cliff like all large pharmaceutical companies. So what makes this company special? The pipeline and its newly launched drug Yervoy.
Yervoy is a treatment for late stage metastatic melanoma, and sales have been stunning since launch. In its second quarter on the market, Yervoy had sales of $121 million. Most analysts believe that the drug can have annual sales of over $1 billion by 2015, and that is only for stage III/IV melanoma and doesn't even take into account other possible uses for the drug. We think this drug is going to be a blockbuster. On the call, CEO Andreotti agreed, stating that, "During the second quarter, we launched Yervoy in Europe with a few countries that have already started recording sales, while others have initiated their pricing and reimbursement discussions. In the U.S., brand awareness of Yervoy is at virtually 100%, and the number of accounts ordering the product continues to increase month-over-month. And most importantly, update for Yervoy remains strong, both in hospitals and community-based treatment centers." Bristol-Myers has the resources to ensure Yervoy's continued success, and sales will continue to accelerate in the quarters to come. However, one drug cannot replace the expiring patents on Plavix. To mitigate those effects, the company must have a continuous stream of new drugs. And what is in Bristol-Myers' pipeline is truly unique. There are 52 different drugs in development, ranging from oncology to immunology to metabolics, Bristol-Myers should easily have several successful drugs come to market. But there is one drug in particular that we must highlight, and it is one that will allow Bristol-Myers to grow profitably in the years ahead.
Eliquis is Bristol-Myer's drug candidate to reduce strokes in patients with very irregular heartbeats, a market that is estimated to be worth around $10 billion annually. The FDA has granted fast track review status to the drug, with approval expected by March 28, 2012. On the conference call, CEO Andreotti was confident about the drug's prospects, saying that, "that Phase III studies were very positive and demonstrated Eliquis statistical superiority to warfarin with respect to reducing the risk of stroke and reducing the risk of bleeding in patients with atrial fibrillation. Atrial fibrillation is the leading cause of stroke, affecting approximately 10 million patients worldwide. The results were remarkably consistent across all subgroups and demonstrated a statistically significant improvement in mortality. " Analysts are very upbeat about the drug, with most saying that it will become the dominant treatment in this market, besting Johnson & Johnson's (JNJ) and Bayer's Xarelto. ISI analyst Mark Schoenebaum expects Eliquis to dominate the atrial fibrilation market. Deutsche Bank sees peak sales reaching $2.5 billion and Barclays says the drug is their top pick in the oral anticoagulant sector for the next decade.
Bristol-Myers not only has a strong product portfolio, but a strong balance sheet as well. The company has good cash flows, over $5 billion in net cash on the balance sheet, and a rising dividend.
Not all pharmaceutical companies are created the same. Each is different. Bristol-Myers Squibb stands out due to its pipeline, financial strength, and growth potential. A dividend yield of over 4%, one that grows 2.9% annually, should keep investors in the stock as the company releases these drugs and watches the profits come in the door. Bristol-Myers may not be a biotech in the traditional sense, its shares should do just as well in the years to come, given its fundamentals and future growth prospects. But while Bristol-Myers is a strong company, Sanofi is even stronger.
Sanofi is a French pharmaceutical company that is truly unique in this sector, for it owns one of the largest biotech companies in the world. Genzyme, which Sanofi acquired in February 2011 for $20.1 billion, was the third largest biotechnology company in the world in 2010. In this deal, Sanofi gained access to the rapid sales growth of Genzyme, and is able to sustain that growth with cash flow from its traditional pharmaceutical business. Sanofi, unlike many of its peers, is putting the patent cliff behind it. On the most recent conference call, CEO Chris Viehbacher stated that, "we [Sanofi] are clearly losing the blockbuster to generics, but the growth platforms continue to power along. Even just a year ago, they were only 58% of our sales. Now they’re 68% of our sales. Now, obviously that’s a function of loss of sales on the blockbuster, but clearly also very good double-digit growth on those growth platforms. And as I’ve said on the 6th of September, at our Investor’s seminar, these growth platforms will really represent close to 80% of the business by 2015. So when you look at those growth platforms you’re really looking at the new Sanofi." Sanofi is diversifying its revenue base, and the company will be re-invented by 2015. Growth areas include emerging markets, Genzyme, vaccines, animal health, and its new drugs.
Continued investments in these growth initiatives led Sanofi to post sales growth of 10.1% in the third quarter, even with many products facing generic competition. 471 million euros of sales lost to generic competition were more than made up for by $1.394 billion in increased sales from these growth areas. Sanofi is not only investing aggressively and successfully in these areas, it is also investing in its pipeline, one of the industry's best.
There are a number of exciting new drugs in Sanofi's pipeline. 5 drugs have been submitted to regulatory agencies.
Of these 5 drugs, we are particularly bullish on 2. Zaltrap has shown that it can significantly improve survival in colorectal cancer patients. And analysts are bullish on Lyxumia, Sanofi's diabetes drug developed with Zealand Pharmaceuticals. Sanofi is standing out in a crowded diabetes market by differentiating Lyxumia with easier and clearer dosing, making the drug more appealing to both doctors and patients. But Sanofi is not a company to sit idly by. Even as itlaunches multiple drugs, it is developing its pipeline.
The Genzyme acquisition gave Sanofi access to a biotech pipeline matched only by standalone biotech firms. Mobility, Sanofi's rheumatoid arthritis drug, is in Phase III trials. The company reported great Phase IIb trials, with patients seeing a significant improvement over the standard methotrexate treatment. Its new insulin formulation is in clinical trials, and the company's anti-PCSK-9 inhibitor for hypercholesterolemia is shaping up to be, according to Sanofi management "one of the leaders in that [field], if not the leader. And we would expect to go into the Phase III with that product in the second quarter of 2012." Sanofi and its partner Regeneron Pharmaceuticals (REGN) were the first to discover that this compound can lower cholesterol, and will cement their first mover status in 2012.
To us Sanofi is a great investment, for it combines the growth potential of a biotech company with the stability of a multinational pharmaceutical company. While Sanofi does have nearly 7 billion euros of debt, this is due to the fact that the company issued $7 billion in debt to fund the Genzyme acquisition. We think that this was a good idea, for it avoided shareholder dilution and Sanofi's strong free cash flows will allow net debt to quickly decrease.
Sanofi's unique pipeline, backed by the strength of Genzyme, its growth initiatives, and 5% dividend should be enough to lure any investor. Biotechs can be wonderful investments, but in markets like these, they can simply be too risky. Hiding out in the pharmaceutical sector is acceptable, but giving up growth is not. Sanofi is both a biotech company and a traditional pharmaceutical company, blending the best of both into something unique. And while Bristol-Myers Squibb may not have Sanofi's fundamentals, there is still plenty to like with that company.
While we would recommend Sanofi over Bristol-Myers, investors cannot go wrong owning either company. Solid financial profiles, great dividends, and a bright future can make any company a great investment. When investors see companies that exhibit all three, it is all but certain that they will deliver great returns for their investors. We think now is a great time to add to or initiate a position in either Bristol-Myers Squibb or Sanofi. Both of these companies are helping improve the lives of millions of patients, and their stocks will help improve any portfolio.