The market was quickly shaken out of its post-holiday slumber with a volatile start to 2016. For selective stock traders, the lower prices present an opportunity, and one that I like right now is Biogen (BIIB), one of the biggest biotech companies on the planet.
Biotech presents us with an unusual upside opportunity at the start of this new year. The industry as a whole remains as innovative as ever, with real potential to change human lives over the long term and make a whole lot of money in the process. In the here and now, I like the way the biotech group seems to be less than halfway through a recovery from post-correction lows.
While Wall Street has cooled on hypothetical growth stories and the extreme multiples many early-stage biotech companies once commanded, the future of those speculative plays doesn’t really concern me at the moment. I’m more about the heart of the industry — the multi-billion-dollar companies that have already done the heavy lifting to get drugs through the FDA and onto the market.
BIIB is a wonderful example of this kind of company, having pioneered many of the immunological and gene therapy approaches that now dominate the biotech business. With ten drugs on pharmacy shelves booking $10 billion a year in revenue, there’s no danger that BIIB is going to burn through its existing cash any time soon.
Instead, margins on those drugs are high enough to support the company even if the tides of politics force biotech prices downward. BIIB currently enjoys a net margin around 35% compared to the roughly 25%-30% that more conventional Big Pharma manufacturers like Pfizer (PFE) can command, so there’s a little room here for concessions without endangering the overall franchise.
Looking at the chart, you can see BIIB had a nice 12% run from $275 to $310 in December. However, the volatility here at the beginning of 2016 has brought it back down below $295. It has broken back below its 50-day moving average but sits right on its 9-day as I write this.
Reclaiming the 50-day would take the stock back above $300, and a move back to the 200-day would take BIIB another 13% higher to $341. Remember, this was a franchise that was worth as much as $338 going into the correction and a whole lot more ($480) before the earnings trend faltered.
It’s a story that plays out over and over across the biotech landscape. The group as a whole is still more than 20% below its pre-correction peak, so the double-digit rebound we saw in December has room to continue as we get past the current volatility.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader,Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.