Pharma stocks can serve as a profitable addition to investment portfolios. With 10,000 baby boomers aging into Medicare every day, and a Medicare Part D drug plan to subsidize the cost, demographics and government subsidies has created a virtuous cycle for healthcare stocks.
However, some of these trends have worked too well in pushing the prices of pharma stocks higher. As a result, some have seen price levels that its profits (assuming they exist) cannot sustain. Additionally, biotech stocks are inherently risky due to the process of drug development and approval.
Here are 5 pharma stocks investors should consider selling — at least for now:
Cronos Group (CRON)
Cronos Group (NASDAQ:CRON) markets dried cannabis and cannabis oil. It sells medical marijuana products primarily in Canada and Germany. While customers in Canada may recognize brand names such as OGBC and WMMC, they sell most of their product under the brand name Peace Naturals.
Wall Street tends to group Cronos with other pharma stocks. However, Main Street views Cronos as a marijuana stock. As such, legalization of recreational marijuana in its home country has driven CRON stock. The Toronto-based company rose to record highs in August and September in anticipation of full legal status. Since this status became official on October 17th, CRON stock has fallen. It has lost nearly 45% from its September peak. Since October 17th, it has lost over one-fourth of its value.
Despite this dive, the stock still trades at 237 sales and about 8.75 times its book value. Analysts expect to see revenue growth exceeding 400% both this year and next. They also will likely see profitability this year. Due to its underlying product, investors will see it as a marijuana rather than a drug company for the foreseeable future.
Moreover, with a $1.5 billion market cap, it will more likely become a buyout target by either a drug or a cannabis company than a standalone firm. I also believe that will happen at a much lower valuation. While I see a high future for this industry, CRON stock will more than likely continue to chill out.
Intercept Pharmaceuticals, Inc. (ICPT)
Intercept (NASDAQ:ICPT) specializes in therapies for treating chronic liver disease. One of its primary treatments, Ocaliva gained FDA approval for the treatment of primary biliary cirrhosis in 2016. Another drug and continues to see higher sales. Intercept also has reached late-stage trials in treating non-alcoholic steatohepatitis (NASH), a leading cause of liver transplants.
Obviously, any drug that can prevent liver transplants will enjoy high demand. However, this optimism has not translated into stock gains. This stock has spent most of its history struggling. It launched its IPO in 2012 and spiked as high as $437 per share in 2014. By February 2018 it had fallen to just above $51 per share. It has recovered since. Still, at just above $100 per share, it still trades well off record highs.
ICPT stock may never again reach that record high. Despite double-digit revenue growth, for now, ICPT remains a money-loser. Currently, no analysts project a profit for this equity through 2021. Yet, even with the declines, ICPT still trades at over 18 times sales and above 20 times its book value. Intercept has shown potential in saving patients from chronic liver disease. Still, pharma stocks have to also earn profits. If Intercept keeps bleeding cash, ICPT stock will likely not benefit.
Ionis Pharmaceuticals (IONS)
Ionis (NASDAQ:IONS) utilizes antisense technology, an innovation that allows researchers to manipulate genes to treat disease. With antisense, it has developed a pipeline of drugs to treat a variety of conditions. Its most prominent drug is Spinraza. With this drug, it partnered with Biogen (NASDAQ:BIIB) to advance the treatment of spinal muscular atrophy. Ionis has also developed drugs such as Tegsedi and Kynamro.
These drugs have helped increase revenues by an estimated 20.6% this year and 35.8% in 2019. However, profits have so far eluded this mid-cap biotech company. Analysts forecast a profit of 40 cents per share next year. Still, that would take the forward P/E ratio of IONS stock to about 125.
This may explain why IONS stock has seen little movement over the last few years. IONS stock trades at just over $50 per share. It first attained that level in early 2014. Wall Street forecasts an average annual profit growth of 40% per year for the next five years. However, given the triple-digit P/E ratio, becoming profitable may not bring Ionis out of its trading range. Innovation on the drug front should finally bring Ionis the profits it needs to thrive as a company. However, at these multiples, new buyers should look to other pharma stocks for gains.
Neurocrine Biosciences (NBIX)
Neurocrine (NASDAQ:NBIX) develops drugs to treat conditions of the central nervous systems and endocrine systems. The company’s immediate future revolves around three drugs. Neurocrine partnered with AbbVie (NYSE:ABBV) to develop Orilissa, a drug approved to treat endometriosis and in late stages for approval in treating Uterine Fibroids. Another drug, opicapone, helps patients with Parkinson’s disease. A third treatment, Ingrezza, treats symptoms of Tourette’s syndrome and received FDA approval in 2017.
Investors have responded to this pipeline by taking the NBIX stock price to around double the levels seen 18 months ago. The company became profitable only recently. However, even with much higher profits next year, this has become an expensive compared to other pharma stocks. Its 2019 forward P/E will still come to about 57. Moreover, it trades almost 29 times sales and over 24 times its book value.
Despite these metrics, many analysts expect growth to eventually justify these levels. The average price target currently stands at $133.31 per share. Also, one forecast predicts average annual growth of 135.6% per year for the next five years. For this reason, this has become a case of prices moving ahead of growth rather than any inherent flaws in the stock.
Additionally, it remains possible that NBIX could see valuation metrics comparable to what Amazon (NASDAQ:AMZN) has enjoyed and continue to move higher. However, at this point, NBIX has become priced for perfection. At this time and this price, investors should probably stay away.
Repligen Corp (RGEN)
Repligen (NASDAQ:RGEN) produces biologic drugs through innovations in bioprocessing. One important emphasis involves monoclonal antibodies (mAbs). These mAbs come from immune cells cloned from a parent cell. Life science firms, manufacturers, and biopharmaceutical companies work with Repligen to improve their processes.
Demand for these biologic drugs has increased in recent years. As a result, RGEN stock has enjoyed outsized, sustained growth for most of the decade. RGEN sold in the single-digits as late as 2013. Today, it trades near record highs at about $67 per share. As a result of the growth, RGEN stock now trades at about 78 times forward earnings. Such a run-up often leaves investors wondering how long the stock price growth can last.
The future of RGEN stock appears bright. The company will probably improve on the 5.8% growth forecast for this year. Wall Street projects 16.4% profit growth next year. Analysts also believe that profit growth will remain in the double-digits for the foreseeable future. However, this improved profit growth still makes the 78 P/E ratio pricier than other pharma stocks. RGEN stock could become a great buy if the stock pulls back. However, at its current price, investors should pass.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.