Are you a growth investor looking for an opportunity within the biotech sector? Are you looking for a company with the ability to demonstrate some very nice upside potential? If that's the case, then I've found what seems to be a very solid biotech firm that is clearly outpacing some of the biggest names in the biotech sector.
On Thursday, Oct. 4, analysts at Morgan Stanley initiated coverage on shares of Neurocrine Biosciences (NBIX). The firm initiated its rating on the stock by declaring the company an Overweight and set a $12/share price target. According to StreetInsider.com, "The firm is positive on Elagolix and sees 2020 sales of approximately $720 million." As a result of the initial coverage, shares of NBIX reacted quite nicely by trading up as much as 2.25% before closing the week at $8.55/share.
I wanted to examine the company a bit further and take a look at how it compares to some of the biggest names in the biotech. I also wanted to determine whether or not NBIX should be considered an alternative for those who were looking to establish a position in either Merck (MRK) or Abbott Labs (ABT).
Overview of Neurocrine Biosciences
According to the company's website, "Neurocrine Biosciences, Inc. of San Diego is a product-based biopharmaceutical company focusing on the development and commercialization of innovative pharmaceutical products to treat unmet medical needs." As per the company profile on Yahoo Finance, its portfolio includes, but is not limited to, Elagolix, a Phase II drug for endometriosis; Vesicular Monoamine Transporter 2 Inhibitor (VMAT2), a Phase II drug for movement disorders; CRF2 Peptide Agonist, a Phase II drug for cardiovascular diseases; CRF1 Antagonist, a Phase II drug for stress-related disorders; and Elagolix, a Phase II drug for uterine fibroids.
As a whole, I've found that the biotech sector has one of the widest ranges of profit margins when compared to some of the other industries I've written articles about. The average profit margin of the three companies featured is a pretty moderate 17.08%. In the last 12 months, Neurocrine Biosciences has managed to demonstrate a profit margin of 42.00%, whereas direct competitors Merck and Abbott Labs have demonstrated profit margins of 13.93% and 12.39%, respectively. If we examine those numbers a bit more closely, we'll notice that Neurocrine Biosciences outpaces both Merck (by a ratio of 3.02-to-1) and Abbott Labs (by a ratio of 3.39-to-1), which in itself can be a very positive catalyst for any potential investor looking to avoid some of the bigger drug makers.
When we examine margins as a whole, we need to do it in two parts. Thus, I wanted to comparatively examine the operating margins of the three companies featured in this article. The average operating margin of these three names is a pretty admirable 27.71%. In the last 12 months Neurocrine Biosciences has managed to demonstrate an operating margin of 38.38%, whereas direct competitors Merck and Abbott Labs have demonstrated weaker profit margins of 22.97% and 21.78%, respectively. If we examine those numbers a bit closer we'll notice that, once again, Neurocrine Biosciences outpaces both Texas Instruments and Analog Devices by ratios of 1.54-to-1 and 2.15-to-1, respectively.
Would I consider a position in Neurocrine Biosciences based on the company's recent margin comparisons, in the wake of Morgan Stanley's upgrade? I would absolutely consider a position in Neurocrine Biosciences, especially since both profit and operating margins are very solid and have the ability to continue to outpace some the largest drug makers in the market. As is the case with any stock, potential investors may want to explore another fundamental comparison in an effort to reinforce their decision to establish a position in the stock.
Returns on Assets and Equities Over the Last 12 Months
In the wake of a very strong showing on the part of Neurocrine Biosciences, in terms of both profit and operating margins, there is one secondary comparison to examine. The average return on assets by all three companies featured is a pretty mediocre 8.56%. Neurocrine Biosciences managed to demonstrate a return on assets of just 10.46%, whereas Abbott Labs managed to demonstrate a return on assets of 8.67% (which was outpaced by NBIX by a ratio of 1.20-to-1) and Merck managed to demonstrate a return on assets of 6.56% (which was outpaced NBIX by a ratio of 1.59-to-1).
The average return on equity by all three companies featured is a pretty steady 22.60%. Neurocrine Biosciences managed to lead the pack once again and demonstrate a return on equity of 36.79%, whereas Abbott Labs managed to demonstrate a return on assets of 19.16% (which was outpaced by NBIX by a ratio of 2.09-to-1). Merck managed to demonstrate a return on assets of 11.86%, which was outpaced by NBIX by a ratio of 3.10-to-1.
Do NBIX's returns on both assets and equity strengthen the case for potential investors to establish a position? I really think they do, and if anything those numbers actually make me more attracted to the company than I was before. If we consider the fact Neurocrine has managed to demonstrate great returns on top of even greater margins over the last 12 months, we'll notice there really is plenty of room for a company of this size to grow.
Should potential investors consider a position in Neurocrine Biosciences as an alternative to a position in Merck and Abbott Labs based on the two fundamental comparisons I've presented in the wake of Morgan Stanley's new coverage? Yes, they certainly should consider a position in Neurocrine Biosciences as an alternative to companies such as Merck and Abbott Labs. Based the comparative analysis I've presented, which demonstrates the fact that NBIX's margins and returns outpace both MRK and ABT, I'd remain very positive on the company and look to establish a medium-sized position at this time.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.