The past year has been tough for biotech stocks, with the iShares Nasdaq Biotechnology Index (ETF) (IBB) down by about 22%.
Struggling biotech stocks can place all the blame on politics. Specifically, on Presidential aspirant Hillary Clinton, who vowed to rein in drug pricing if she were to become the POTUS. She even directly criticized Valeant Pharmaceuticals Intl Inc (VRX).
If Clinton does become the POTUS and is able to push through legislation that caps drug pricing (or anything similar to that), the pressure will weigh heavily on biotech companies. The worries are genuine.
For instance, in last year’s post-earnings analysis of Amgen, Inc. (AMGN), I highlighted the driving force behind Amgen’s increase in drug sales — price increases. So, if legislation blocking drugmakers from dramatically raising prices indeed happens, companies like Amgen could suffer.
However, for every bear market, there’s always a bull waiting to be grabbed by the horns. So here are three biotech stocks that I believe would thrive, even in a price-regulated market.
Biotech Stocks to Buy: Gilead Sciences, Inc. (GILD)
As of Jan. 29, Gilead (GILD) hit a year low of $83 a share from a previous high of $122.21 — a 32.1% drop. It wasn’t until afterward that the GILD stock price rebounded to a per-share price of $98. Even at that, GILD is still down by about 2% over the past year.
But there are two big reasons Gilead isn’t finished making a comeback yet.
The first reason is its continuous dominance in the Hepatitis C market. Its two bestselling drugs, Harvoni and Sovaldi, are HCV drugs.
In my 2015 second-quarter post-earnings analysis of Gilead Sciences, I pointed out how Harvoni, which became Gilead’s best-selling drug in its first full year in the market, would top the HCV market — specifically ahead of Viekira Pak — simply because of its ease of administration, higher cure rates and lower side effects. Just a few months later, reports surfaced about how Viekira Pak wasn’t as safe as thought.
Another competitor has made it to the market in Zepatier from Merck & Co., Inc. (MRK); and a report from Advera Health Analytics states that Zepatier is safer than Harvoni and Sovaldi. But the report doesn’t tell the whole story.
Three things: First, the report actually states patients that have never received HCV treatment responded better to Harvoni, indicating that Harvoni could be more efficient. Second, according to the National AIDS Treatment Advocacy Project, NS5A resistance testing has to take place prior to treatment to determine the recommended duration. Third, according to Hepatitis C Society, Harvoni, which is approved for genotype 1 and 4, has the potential for off label use in genotype 3, 5 and 6. This further solidifies that Harvoni is more efficient than Zepatier.
And let’s not forget that Sovaldi treats patients with genotype 1, 2, 3 and 4. So there’s a bit of moat going for GILD in the HCV market.
The other thing to like about GILD is its valuation: Over the past year, the market has factored less of Gilead’s free cash flow into its stock price (with price-to-FCF dropping by about 25%), despite its free cash flow being on the rise. For comparison, Amgen has a price-to-FCF of 14.6 while GILD has a sports a ratio of 7.6.
Did somebody say bargain?
Biotech Stocks to Buy: Regeneron Pharmaceuticals Inc (REGN)
Regeneron (REGN) has lost 7% of its stock value in a year’s time, and 23% year-to-date. What’s more disheartening than that? A 31% decline from its high. Yikes.
In addition to the industry-wide fear of potential pricing regulations, tempered expectations for sales of its top-selling eye medication, Eylea, for the fourth quarter have contributed to Regeneron’s weakness. There’s also the negative contribution from the lawsuit it lost to Amgen disputing the marketing of Praluent.
Still, the growth opportunity that REGN holds is mouthwatering. First, even though Eylea sales growth is slowing, it still has the potential to become a billion-dollar drug by the end of 2017. Regeneron’s guidance for the drug is a 20% growth in 2016. If achieved, Eylea’s sales would clock in at around $895.2 million. If we assume a further sales growth decline to 15%, it should close 2017 with over a billion dollars in sales. And let’s not forget that this doesn’t include international sales through its partnership with Bayer HealthCare, which is also on the rise.
2017 could be the year it finally starts living up to its hype by having four potential blockbusters in the market.
REGN’s recent win in the eczema space with dupilumab offers such hope. Late stages clinical studies revealed that dupilumab effectively cleared moderate to serious eczema. An analyst conservatively estimates that dupilumab could do up to $3.2 billion annually at its peak.
And then there’s sarilumab, a rheumatoid arthritis treatment, which is already being pushed for regulatory approval.
Yes, REGN has a steep valuation, especially considering that it trades at 25 times 2017 earnings, while Gilead is trading at roughly eight times 2017 earnings. But then for long-term investors, I believe things will even out as REGN begins to actualize its growth potential.
Biotech Stocks to Buy: Emergent BioSolutions Inc (EBS)
Emergent BioSolutions (EBS) sure isn’t a popular name among biotech stocks. EBS makes and sells specialized products to governments and healthcare providers.
It might not be a name that’ll come straight to mind when thinking of biotechs, but the U.S. government definitely loves EBS stock. It has a contract with a maximum worth of $1.5 billon to supply the United States with the anthrax vaccine, a defense against bioterrorist attacks.
The FDA also expanded the use of BioThrax, its core product last year, meaning there’s room for a respectable sales growth for the product. And earlier this year the FDA approved its Anthrasil for post-exposure treatment.
On the back of these progresses, EBS stock has steadily grown its revenue, rising 84% to $523 million over the last five years.
This is one of those biotech stocks that could always stay underground, but is worthy of attention.
As of this writing, Craig Adeyanju did not hold a position in any of the aforementioned securities.