The big biotech stocks out there continue to punish investors for their loyalty. The sector faces near-term headwinds that are preventing stocks in this area from bouncing back. Ongoing government scrutiny over the cost of healthcare continues to pressure the pricing power for drug companies. And as October approaches, a seasonal weakness for stocks could lead to more selling pressure for biotechnology stocks.
What is the beaten-down investor to do? What are the biotech stocks to watch?
Stocks could trade at distressed discounts for a while longer, while their growth prospects will be limited by the inability to raise prices. Having patience is one of the most important trades for the value investor. So long as the company’s pipeline of prospective drugs is strong and sales of products on the market are healthy, investors need not worry. There are seven big names in the healthcare sector that investors should consider.
Below I will grade each big-time biotech stock with a score ranging from A-F to help you choose from them.
Biotech Stocks to Watch: AbbVie Inc (ABBV)
Grade: A
AbbVie Inc (NYSE:ABBV) touched the $65 level a few times in August and attracted bottom-fishers since then. The stock traded recently at close to $74, up over 8% in the last month. So just what is it that investors like with AbbVie?
AbbVie still offers a dividend of 5.94%. That gives investors a cushion, should the stock fall below the price paid. Investors are warming up to the $63 billion acquisition of Allergan (NYSE:AGN). Unions and consumers groups are against the deal, citing fewer choices and higher prices. Yet the two companies operate in a completely different market. If anything, the merger is a must for AbbVie to sustain its long-term growth. Management has proven experience in taking an under-performing asset and raising its returns.
Allergan gives AbbVie the ability to expand its number of growth franchises. Previously, back in 2013, AbbVie knew its blockbuster drug, Humira, would face generic competition. Excluding Humira, the business is worth $30 billion in revenue. If you consider Allergan with its non-Humira assets, it can grow at $30 billion in revenue at the high-single digits over the next 10 years.
AbbVie will continue investing in R&D, SG&A and M&A to support the business and growth initiatives. It will not cut into its dividend at that time. That should please existing AbbVie income investors.
Teva Pharmaceuticals (TEVA)
Grade: C
Teva Pharmaceuticals (NYSE:TEVA) is in danger of breaking below a 52-week low. It resolved the opioid litigation for $85 million, while Purdue will pay $270 million. Meanwhile, Johnson & Johnson (NYSE:JNJ) will settle for $572 million, but it will appeal it.
These settlements remove an unknown on TEVA stock and yet the stock is still falling. Still, the company reported a few positive developments. Last month, it reported a meaningful reduction in monthly migraine days for Fremanezumab. The migraine market is a new area for drug companies, with little competition. Reporting a clinically meaningful 50% decline in monthly migraine days after just four weeks of initial treatment is a feat. The U.S. approved the drug in September 2018, while Europe approved it in April 2019.
Times are volatile, leaving TEVA for investors unwilling to buy the stock until prospects improve. TEVA trades at a forward price-to-earnings ratio of 2.79 times, which signals either a downward revision ahead of investors too fearful to buy the stock. The debt-to-equity of 2X is unfavorable. But if management grows its cash flow each quarter and pays down debt, confidence will build, albeit slowly.
Given the market’s preference to punish the stock regardless of the positive developments, exercise caution but keep the stock on the radar.
Bristol-Myers Squibb Company (BMY)
Grade: A
Bristol-Myers Squibb (NYSE:BMY) bottomed at close to $42 and briefly traded above $50. At a P/E of 13X, the stock is in value territory but markets are waiting for the Celgene (NASDAQ:CELG) deal to close. But why wait? Celgene appeased regulators by selling Otezla to Amgen (NASDAQ:AMGN) for $13.4 billion. BMY also divested its PDE4 inhibitor to gain regulatory sign off to the Celgene merger.
BMY stock pays a dividend that yields 3.29%. Considering the stock trades at 8X forward earnings, investors may hold the stock for regular dividend income and expect shares to head toward the mid $55 range. The asset sale concession by both firms should speed up the merger closing. And the sooner the deal is done, the faster another uncertainty overhang is removed.
I can justify a mid-$50 price target because of the expectation that management will grow the company’s revenue by at least 20%. BMY is getting Celgene at a terrific price. In the last two years, Celgene had stumbled with bringing its pipeline of drugs to the next step, shaking investor confidence and hurting the company’s value. BMY has a strong management team that will fix Celgene. If it gains drug approval sooner than expected, BMY stock might get to the $100 range within a few years.
Regeneron Pharmaceuticals (REGN)
Grade: B
Regeneron Pharmaceuticals (NASDAQ:REGN) toyed with the $300 since around May but failed to break past that level for any length of time. Despite getting support in Europe for the expanded use of its blockbuster drug, Dupixent, markets focused instead on the potential competition for Eyelea.
Developments
Last month on Aug. 12, Regeneron announced that due to REGN-EB3 showing superiority over the control drug, Mapp Biopharmaceuticals’ ZMapp, the study was stopped early. At a production level, the drug may have limited revenue upside for Regeneron. Ebola is a pandemic that is prevalent in poor parts of Africa. Still, having a drug to treat Ebola would bring positive PR value to Regeneron.
Regeneron reported positive results for its Phase 3 Trial studying patients with an inherited form of high cholesterol. Evinacumab successfully reduced cholesterol by 49% in patients compared to lipid-lowering therapies alone. Given the mAbs (monoclonal antibodies) demonstrate a strong safety profile, this drug has a good chance of getting approval.
Strong Performance Ahead
Regeneron’s strong growth in the second quarter should continue in the current quarter and beyond. In Q2, Eyelea global net sales grew 13% to $1.9 billion. Dupixent sales topped $2 billion globally (at an annualized rate). Expect more prescription growth, given its established safety profile and its ability to reduce skin infections. Regeneron is expanding Dupixent’s addressable market in two ways. It is enrolling patients in Phase III studies in eosinophilic esophagitis and COPD. And it is also exploring its effectiveness in allergy desensitization settings such as for grass and peanut allergy.
Bluebird bio, Inc. (BLUE)
Grade: D
Bluebird bio, Inc. (NASDAQ:BLUE) reported revenue growth of 69.4% year-over-year in the second quarter, or $13.3 million, but questions remain. Shareholders are scrutinizing the drug’s effectiveness for treating Thalassemia. If it does not help the majority of patients on the drug, then investors will have a tough time justifying the stock’s $5.29 billion market capitalization. In the last three months, bluebird bio stock fell 22.66%.
The company has a healthy amount of cash: $1.54 billion in cash, cash equivalents and marketable securities. It has the resources to execute on its clinical studies scheduled for the second half of the year. And the funds will cover its costs until 2022. This includes initiating new studies in sickle cell disease, multiple myeloma and early-stage oncology programs.
But since April, markets “sold the news” after the EMA panel recommended approval of its gene therapy drug. Bluebird was quick to triple its CEO’s compensation to $24 million, further fueling bearish selling on the stock.
In the summer, bluebird presented its efficacy and safety data of the gene therapy study. Its chief medical officer, David Davidson M.D. said:
“The maturing data from our clinical studies of LentiGlobin for TDT show that patients across genotypes are able to achieve and maintain transfusion independence with stable production of gene therapy-derived-hemoglobin, HbAT87Q, extending for years.”
Cost is another potential headwind. At EUR 1.6 million (U.S. $1.8 million), investors may only guess how many patients will have the coverage to commence treatment.
The revenue potential is one of many unknowns the company faces right now.
Gilead Sciences (GILD)
Grade: A
In the last week, Gilead Sciences stock looked like a falling knife, dropping from $68 earlier in the month to $63.30. Markets took worries over House Speaker Nancy Pelosi’s plan to allow Medicare to negotiate drug prices. And even though Senate Majority Leader Mitch McConnell ruled out any action on the bill, GILD stock did not bounce back.
Gilead has three things to focus on: the pipeline and how to increase the portfolio, the shorter-term commercial delivery and building the team. Its collaboration with Galapogos is an example of its approach to deepening its portfolio.
With respect to commercial delivery, Gilead needs to ensure delivery of HIV drugs. So far, the delivery of Biktarvy is off to a good start, while its filgotinib will need a strong launch.
At the management level, many of the prior executives transitioned or are transitioning. It had a history of delivering on antivirals but the new therapeutic areas will need scaling, led by enterprise-wide leadership. Gilead’s acquisition of Kite Pharma in 2017 at a cost of $21.6 billion still did not pay off. It is run as a separate business unit. Since cell therapy oncology is very competitive, Gilead must choose what approach to take to grow the business. The company will give updates in the next six to 18 months, which will let investors evaluate Kite’s business value contribution to Gilead.
Gilead’s fair value is potentially over 20% above its $63.30 closing price (per finbox.io). After dipping sharply, value investors have another chance to pick up the stock at a 9X forward P/E multiple.
Biogen (BIIB)
Grade: B
Ever since Biogen (NASDAQ:BIIB) stock crashed from $325 down to as low as around $217, the stock did not recover by much. Shares closed recently at $230.22. After Biogen terminated development of its Alzheimer’s candidate aducanumab, markets quickly revised the stock’s valuation lower. What is the long-term upside?
Biogen has a deep pipeline of drugs. BIIB098 (diroximel fumarate), which treats multiple sclerosis, “demonstrated … superior GI tolerability.” Very recently, Biogen demonstrated real-world effectiveness with natalizumab; 70.1% of patients in the study achieved no evidence of disease activity. And 83.7% achieved “no gadolinium-enhancing or new/newly enlarging T2 lesions.”
Despite these strong clinical results, the stock is stuck in a narrow range of between $220 – $240. Valuations are compelling, too. The stock has a P/E of 8.5X and a forward P/E of 7.17X. In all the five-year DCF growth or revenue exit models, the stock has upside of 47%. This assumes Biogen’s revenue will not fall by more than around 3% within the next five years:
| (USD in millions) | Input Projections | |||||
| Fiscal Years Ending | 18-Dec | 19-Dec | 20-Dec | 21-Dec | 22-Dec | 23-Dec |
| Revenue | 13,453 | 14,143 | 13,841 | 13,785 | 13,607 | 13,151 |
| % Growth | 9.60% | 5.10% | -2.10% | -0.40% | -1.30% | -3.30% |
| EBITDA | 7,026 | 8,292 | 8,315 | 7,959 | 7,914 | 7,694 |
| % of Revenue | 52.20% | 58.60% | 60.10% | 57.70% | 58.20% | 58.50% |
Source: finbox.io
Biogen has a Grade A for value and a B overall. The stock needs a positive catalyst to reset the neutral sentiment preventing the stock from rebounding.
As of this writing, Chris Lau held a position in ABBV.
