Big Biotech Gets Thrown Out With The Bathwater

Includes: BIIB, GILD
by: Bret Jensen


Momentum stocks and sectors have crumbled over the past month.

One of these sectors is biotech where carnage has occurred in the small and large cap space.

A couple of large cap biotech stocks that should be the first to bounce back are profiled below.

Momentum stocks and sectors have had a very tough month. One of these recently challenged sectors is in biotech. It is perfectly understandable that some of the small biotechs that had doubled or tripled over the past year before this sell-off have cratered. Most had little in the way of revenues and were posting losses. Investors were betting heavily, too heavily as it turns out, on the prospects the products in the pipeline would make it through trials and be approved.

However, large cap biotechs with major earnings and impressive revenue and earnings growth have been negatively impacted as well. This seems like a "throwing the baby out with the bathwater" moment. This correction could last a while, but when I believe these larger biotech plays will be the first to recover.

Below are two attractive large cap biotech stocks I have been slowly adding to on the dip.

Gilead Sciences (NASDAQ:GILD) is engaged in the discovery, development and commercialization of treatments to fight viral, bacterial and fungal infections, respiratory disorders, cardiovascular conditions, and cancer. It has major drug franchises treating HIV and Hepatitis C.

Gilead has dropped ~$12 a share over the last month. The decline has happened despite the fact that its new Hepatitis C drug Sovaldi is having a much stronger start than expected. Despite congressional screams about the drug's prices, initial prescriptions show it is off to a strong start. S&P had the drug having sales of $2.6B in 2014 before report but it appears that figure could be $5B or higher which would make Sovaldi the most successful pharmaceutical product launch ever.

Gilead's revenues are projected to rise ~45% this year and ~30% in 2015 according to the current consensus. Earnings are expected to grow ~80% this year and more than 50% in 2015. These estimates do not factor in higher initial sales of Sovaldi evident in initial prescription data. With the recent decline, GILD goes for 12.5x 2015's consensus EPS. This is too cheap given the company's growth trajectory.

I also bought some Biogen Idec (NASDAQ:BIIB) late on Friday. The stock has dropped ~$70 a share in a blink of an eye in the carnage throughout the biotech sector. Revenue growth is not as fast as Gilead's but it is still impressive. Consensus has sales increasing some 25% this year and 2015 should see gains in the mid-teens.

Earnings are on a nice trajectory as well. Biogen Idec earned just under $9 a share in 2013. Consensus estimates have it earning more than $11 a share this year before jumping to over $14 a share in 2015. These estimates could prove conservative. The company has easily beat earnings estimates for four straight quarters.

Biogen also has a fairly low beta (1.34) for a biotech stock. The 25 analysts that cover the stock have a price target north of $350 a share on BIIB. BMO Capital upgraded the shares to "Outperform" in March and placed a $422 price target on the shares. Its compound for Hemophilia B was recently approved in the U.S. and Canada as well.

Disclosure: I am long BIIB, GILD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.