Biotech stocks are getting crushed to start 2016, with the iShares NASDAQ Biotechnology Index ETF (IBB) down a devastating 17%. The weak performance from IBB has pushed the broader market to a 7% decline to open the year.
Granted the IBB is up nearly 200% over the last five years. As a result, this pullback among biotech stocks might actually be healthy, especially with the valuations of biotech stocks being stretched.
However, there are also stocks that just get caught in the crossfire — companies that are worthy of their valuations but have since sunk behind a bearish industry.
Therefore, let’s look at seven of the biggest decliners, and seven of the closest-watched biotech stocks to determine if any are presenting a good buying opportunity.
Biotech Stocks: Celgene (CELG)
Celgene Corporation’s (CELG) stock has fallen 14% in 2016, after a modest 6% gain last year.
This year, CELG is expected to grow revenue by 20.6% to $11.1 billion, and its projected full-year EPS of $5.68 represents an increase of another 19%. In other words, CELG is a company with 20% growth that’s trading at less than 20 times this year’s expected earnings. For a company like CELG, that’s a bargain!
CELG gets most of its annual revenue from the cancer drug Revlimid. Revlimid is a blockbuster drug that had sales growth of 16% last year, and CELG has patent protection all the way until 2026. However, investors should expect a lot of changes at CELG over the next four years, with the company expecting sales to surge from $11 billion this year to $21 billion by 2020.
CELG will capitalize on the continued growth of Revlimid, the development of its recently launched inflammation and immunology franchise, and the development of recently acquired Receptos. Don’t forget, CELG recently paid $7.2 billion for Receptos, a company whose lead candidate Ozanimod is in Phase 3 trials.
This is a drug that could ultimately treat MS, Ulcerative Colitis, and possibly Chron’s disease, but won’t achieve most of its $4 billion to $6 billion in peak sales until after 2020. In other words, with CELG stock at 19 times this year’s earnings, there’s a lot to like about it moving forward.
Biotech Stocks: Biogen (BIIB)
Biogen Inc (BIIB) stock has fallen 10% this year, but that’s minor compared to the 40% that BIIB has fallen from its peak last year.
Much like CELG creates the majority of its revenue from a single product, BIIB relies on its MS franchise, mainly Tysabri and Tecfidera. A significant slowdown in sales for Tecfidera has affected the company’s top and bottom lines, following a progressive multifocal leukoencephalopathy (PML)-related death in a patient taking the drug.
As a result, physicians have been showing more caution before switching patients to the more effective, but more threatening Tecfidera.
With more than 30% of BIIB’s sales coming from the drug, investors are concerned about the company’s future. That’s why BIIB is likely fairly valued.
The one wildcard is BIIB037, a drug that has shown early promises at treating Alzheimer’s disease. In a study of 166 patients, BIIB037 produced a positive effect in both Clinical Dementia rating (CDR) and mini mental state exam (MMSE). The big question is whether strong data will hold up, as BIIB will still need to conduct many trials for the drug to earn an FDA approval to treat the 5 million worldwide that suffer from this disease.
Biotech Stocks: Amgen (AMGN)
Amgen (AMGN) is a very large biotechnology company, one of the largest in the IBB, with revenue of more than $21 billion last year. Yet AMGN stock has fallen 8% this year, trading at just 14 times this year’s expected earnings.
AMGN is driven by a collection of drugs, at least half a dozen blockbuster products. Looking ahead, there are two big catalysts to catapult sales. First, it has the cholesterol lowering drug evolocumab that could top $5 billion in peak sales. The second factor is pipeline development and label expansion.
One promising drug is Krypolis, which Amgen acquired from Onyx, to treat multiple myeloma. When it was acquired, Krypolis treated a patient population who had relapsed at least twice, but after strong data, it’s expanded into treating those who have relapsed just once. That expansion instantly boosts the outlook, and AMGN has many similar examples in its pipeline.
All things considered, AMGN may not have the biotech flash of a CELG or BIIB, but at just 14 times this year’s earnings it is a diversified, growing stock to buy on its recent price weakness.
Biotech Stocks: Gilead Sciences (GILD)
Analysts estimate that Gilead Sciences (GILD) pulled in $30 billion in annual revenue in 2015 and earned more than $12 per share. So GILD seems like a slam dunk at just eight times earnings. After all, the stock has fallen 8.5% this year.
Yes, Gilead’s HCV franchise is one of the best-selling drug combinations ever, and yes, the success from its HCV franchise has exceeded all expectations. However, the big question everyone is asking is what GILD is going to do with the cash it is accumulating from the success of Harvoni and Sovaldi.
GILD now has $25 billion in cash & equivalents, up from $17.7 billion last year. More than likely, GILD’s cash pile will grow by a similar margin this year, with its operations creating north of $20 billion in annual operating income.
Nevertheless, GILD stock has been unable to break out and better reflect its earnings. GILD has its HCV franchise, a successful business in treating HIV and a pipeline that could make it relevant in treating cancer. However, GILD needs to put that cash to work, with either a massive buyback plan or by acquiring the next Pharmasset.
Until it makes one of those two moves, I wouldn’t buy GILD, as it has proven itself to be dead money.
Biotech Stocks: Regeneron (REGN)
Regeneron Pharmaceuticals (REGN) is down 16% this year, a quite unusual start for a stock that is up 1,200% over the past five years. REGN is known for Eylea, a drug that prevents blindness in a small patient population that suffers from a degenerative disease.
During’s Regeneron’s latest quarter, 64% of its $1.14 billion in revenue was created from Eylea, and the company is guiding for 50% to 55% growth in 2016 from that drug.
However, REGN also has a new cholesterol-lowering drug like Amgen’s evolocumab, which is expected to generate several billion dollars of peak revenue. This year total sales are expected to rise 48% to $4.1 billion.
With REGN growing very fast, and having a deep pipeline, it is well worth a steep multiple versus other big biotechs on this list. At 31 times this year’s expected earnings, REGN looks like a long-term bargain.
Biotech Stocks: Alexion (ALXN)
Alexion Pharmaceuticals (ALXN) is the maker of Soliris, an Orphan drug that treats a number of rare blood and genetic disorders. Currently, Soliris is the most expensive drug in the world, and in addition to that, ALXN has another genetic disorder drug called Kanuma that’s FDA approved.
With that said, ALXN is also a company that has seen 14% of its valuation wiped out in the early days of 2016. However, at 28.5 times this year’s expected earnings, it is still quite expensive.
In retrospect, ALXN is nearly as expensive as REGN but with expected growth of just 22% this year, it is growing about half as fast. Therefore, it’s hard to make a long case for ALXN compared to other stocks in the IBB.
Biotech Stocks: Acadia (ACAD)
Acadia Pharmaceuticals (ACAD) has been one of the worst-performing biotech stocks in 2016, losing 35% of its value so far.
In all fairness, much of this accelerated loss is the company’s own fault, announcing a $300 million public offering on Jan. 5, just before the bottom dropped out of the biotechnology industry.
While it may sound strange, the timing of that offering and the recent losses in ACAD stock might actually be the greatest gift that investors could get for 2016.
As explained in a previous article, ACAD has a great shot to double this year, and that was back when ACAD was $4 billion company. Now that market cap has been reduced to less than $3 billion.
This is a company whose drug will almost certainly be FDA approved early this year, and could reach blockbuster sales status very quickly. Acadia’s Nuplazid is an antipsychotic that significantly reduced psychotic episodes without the side-effects associated with drugs in this class, thereby earning it a Breakthrough Therapy designation and a Priority Review by the FDA.
In other words, ACAD is certainly a great buying opportunity following its recent loss, especially now that necessary financing is out of the way.
As of this writing, Brian Nichols was long ACAD.
