What Are The Best Bets In Biotech?

By Greg McFarlane AAA

When everyone else is panicking, it’s time to swoop in and pick up some undervalued assets.

Easy enough in theory, but in practice it takes some work to determine what’s an undervalued asset and what’s the contemporary equivalent of Confederate money. The stock of a randomly selected social gaming company, whose products are ultimately of limited utility, might likely fall in the latter category. The stock of a biotechnology company that provides, or might one day provide, vital benefits to humanity is a different investment altogether. With the NASDAQ Biotechnology Index now off 18.5% from its latest zenith, some of the stocks whose price movements have contributed to that decline are ripe for the shrewd and opportunistic investor.

The NASDAQ Biotechnology Index (Nasdaq:NBI) tracks the movements of the stocks of 121 companies, each of which has a market capitalization of at least $200 million (among other criteria.) However, unlike the Dow Jones Industrial Average or other principal indices, the NASDAQ biotech index is weighted. Its top nine components make up most of the index’s value.

Musical Chairs

In the last few weeks, the biotech industry has been one of the most dynamic in the market, undergoing so many asset sales and takeover attempts that you need a scorecard and several pencils to keep track of the movements. Montreal’s Valeant Pharmaceuticals International (NYSE:VRX) made a hostile bid for Irvine, Calif.'s Allergan Inc. (NYSE:AGN). New York’s Pfizer Inc. (NYSE:PFE) made a similar overture to London-based AstraZeneca plc (NYSE:AZN). Meanwhile, Basel, Switzerland-based Novartis International AG (NYSE:NVS) swapped its vaccine operations (along with billions in cash) for Brentford, England-based GlaxoSmithKline plc’s (NYSE:GSK) cancer business. Once everything settles and we have some stability, to the extent that the market is ever stable, expect fewer players wielding greater influence than ever before in this growing sector.

One company that’s emerged to possibly thwart a takeover is Thousand Oaks, Calif.-based Amgen Inc. (Nasdaq:AMGN), a maker of some serious pharmaceuticals that you should consider yourself fortunate to never receive a prescription for. These include Enbrel, a rheumatoid arthritis drug that runs about $2,700 per month; and Neulasta, a white blood cell stimulant for leukemia patients that makes Enbrel look like a bargain.

Amgen stock has remained somewhat consistent for the last three quarters, and at least one analyst thinks the company could best Pfizer’s offer for AstraZeneca. That would be a fitting next stage to Amgen’s and AstraZeneca’s two-year-old agreement to jointly develop drugs that fight everything from colitis to lupus.

Amgen Undervalued?

But is Amgen stock an undervalued asset? The company is the second-largest component of the NASDAQ biotech index, comprising approximately 8% of its value. The stock trades at about 17 times earnings, which is not only low for its industry but low for Amgen’s ability to earn. Profit margins were 27% last year, this in a business where large research and development expenses are part of the game. Dividend payouts are generous, making the company’s only true negative metric being its inability to meet Wall Street forecasts. For a certain type of investor, there’s nothing remotely negative about that.

Foster City, Calif.-based Gilead Sciences Inc. (Nasdaq:GILD) is the NASDAQ biotech index’s third-largest component, and its second-largest with fundamentals that bear at least a superficial similarity to Amgen’s. Gilead initially gained fame for its HIV/AIDS drugs, and expanded into hepatitis C therapy in 2011. The company did the latter by acquisition, with unmistakable results.

Last month, the newly fortified Gilead brought a phenomenally effective hepatitis C drug to market, one so groundbreaking that the U.S. Food and Drug Administration fast-tracked it. The drug, Sovaldi, treats patients over a three-month period, which is considerably shorter than the industry standard for hepatitis C regimens. Three months’ worth of Sovaldi costs $84,000. Some insurers balk at the price tag, but Gilead’s margins on Sovaldi are merely high, not extortionate. They contribute to an overall company profit margin of around 27%, which is actually down from 33% a couple of years ago but still the envy of most every established company on the exchange. Down off its late-February zenith, Gilead currently trades in the high 70s, allowing considerable room to reach the consensus one-year target estimate that’s knocking on the door of three digits, which would be a all-time high for the company.

The Bottom Line

Nothing offers guaranteed appreciation. But at least you can invest in something whose indicators appear to indicate an eventual gain. With the recent pullback in shares, a few of the NASDAQ biotech index's components appear to be capable of making today’s buyers very happy. 

 

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