In addition to financial stocks, the healthcare sector and biotech stocks breathed a collective sigh of relief following the election of Donald Trump as President. It is widely believed that a secular trend of increased regulation on these industries will at least subside over the next four years.
Biotechnology companies have faced an onslaught of negative press and concern over higher drug prices. But, on balance, drugs that help cure diseases (such as Gilead Sciences, Inc.‘s (NASDAQ:GILD) Solvani and Harvoni drugs) and let people live longer, are great for society.
Of course, charging exorbitant prices for drugs of more questionable efficacy or making pricing confusing hurts the industry’s overall reputation.
The following are three biotech stocks to buy because they offer important drugs and have pipelines with promising potential. Smaller biotech firms offer much more room for upside, but are risky as the vast majority of drug candidates don’t successfully make it to market.
Despite the current rally, these three large industry players still look like great investment candidates at current levels.
Beaten-Down Biotech Stocks to Buy: Biogen Inc (BIIB)
Shares of Biogen Inc (NASDAQ:BIIB) have rallied back toward their 52-week highs since the election, but still represent one of the more compelling investment opportunities in biotech.
BIIB dominates the drug treatment space for multiple sclerosis, a very challenging condition by which an individual loses muscle control because central nervous tissue hardens in the brain and spinal cord. The firm sells Avonex, Tysabri and recently released Tecfidera to help maintain its dominance and treat patients.
Tecfidera sales grew a healthy 10% to $1 billion during Biogen’s third quarter. This represented a third of total sales of nearly $3 billion. Total other multiple sclerosis drugs fell 10% to $708 million to make up most of the rest of sales. A couple of drugs to treat hemophilia (uncontrolled bleeding) represented the rest and grew in excess of 30%.
Analysts are fired up about Tecfidera’s prospects and estimate peak annual sales of almost $5 billion. There is also pipeline potential, with further drugs to treat multiple sclerosis, pain and Alzheimer’s, another tough disease that causes an individual to slowly lose his or her memory.
Total company sales growth should be healthy at at least 5% for the foreseeable future. Annual earnings growth can hit the double digits due to operating efficiency and stock buybacks. At a forward price-to-earnings of only 15, BIIB looks to offer a great combination of growth at a reasonable investing entry point. The downside is capped — as with most companies in the healthcare space, demand for the underlying product is steady regardless of the economic cycle.
Biogen’s average earnings multiple over the past five years is closer to 29. It isn’t growing as fast as in earlier days, but being able to buy a bellwether in the biotech space at a multiple below the market average (about 19) seems a relatively safe bet.
Beaten-Down Biotech Stocks to Buy: Amgen, Inc. (AMGN)
Biotech titan Amgen, Inc. (NASDAQ:AMGN) was one of the first firms in biotechnology. Now, it trades at an even higher discount to the market — its forward P/E is only 12.
The tradeoff, of course, is that AMGN’s fast-growing days are behind it. Sales and profits will be lucky to grow by a couple of percentage points annually over the next few years. With more than $22 billion in annual sales, the company resembles a Big Pharma firm, as opposed to smaller and more nimble biotech stocks.
For years now, Amgen has relied on a stable of anemia (low red blood cell count) treatments and drugs that help keep white blood cell counts high during cancer treatments. AMGN’s pipeline is thought to have some solid candidates, but the current drugs are also subject to biosimilar competition.
To offset the slower-growth trends, Amgen offers safety both for investors and being able to succeed as a firm. Again, its sales aren’t susceptible to economic downturns. Its dividend yield of 2.7% offers some income for investors. AMGN also boasts $38 billion in cash on its balance sheet to grow the dividend payout, buy back stock and pursue acquisitions.
Beaten-Down Biotech Stocks to Buy: Celgene Corporation (CELG)
Celgene Corporation’s (NASDAQ:CELG) claim to fame is its blockbuster drug Revlimid for the treatment of multiple myeloma. Worldwide sales of Revlimid jumped an impressive 30.1% to $1.9 billion for Celgene’s third quarter that ended Sept. 30.
Continued growth of Revlimid is a key reason that CELG expects sales growth to average 18% through 2020 to more than $21 billion. It projects earnings growth will be even stronger — 23% to $13 per share by then.
A potential drawback is that Revlimid accounts for the bulk of sales. For the quarter, it made up 63% of the total top line. Pomalyst, which also helps treat multiple myeloma, is growing briskly and accounted for more than 10% of sales. That is about it for fast-growing drugs.
CELG’s pipeline has some potential blockbusters in oncology (cancer) and psoriasis (chronic skin condition), but also some fierce competition in the multiple myeloma market from rivals including AMGN and Johnson & Johnson (NYSE:JNJ).
Despite the uncertainty, Celgene should be able to grow both sales and earnings at double-digit rates for at least the next five years. If profits hit the company’s targets and a similar earnings multiple is applied, CELG stock can double by 2020. That would represent annual stock gains of around 20%.
As of this writing, Ryan Fuhrmann was long shares of Biogen and Gilead.
