Whether it be cancer, multiple sclerosis or kidney disease the companies below create the drugs that make us feel well again. However, drug development is a complex and risky proposition. Always be aware, biotech company's could cure or cause sickness in your portfolio. Caveat Emptor.
Not on Hold Anymore
Biogen Idec (Nasdaq: BIIB) was formed in late 2003 with the merger of IDEC Pharmaceuticals and Biogen. This combined firm now has the third largest biotech-research-and-development budget, annual revenue of $2.7 billion and a market capitalization of $16.3 billion. That translates into a P/E multiple of 77. By keeping its costs under control, the firm also boasts an operating margin close to 20%.
The Food and Drug Administration has taken BIIB's Tysabri off 'hold', and sales are showing good results. This MS treatment could have serious potential as 70% of users are either picking this drug initially or switching to it from other drugs. In addition, Biogen also manufactures Rituxan. The groundbreaking cancer drug produces over $2 billion annually, which is shared with Genentech (NYSE: DNA). Biogen Idec also makes Avonex, an autoimmune-treating drug that generates $1.7 billion in global sales.
The major risk with Biogen Idec is that the company is highly dependent on a handful of drugs. A problem with any one of them could have far-reaching implications for the firm as a whole. It's unknown if there are any additional products coming from its research pipeline.
Genzyme (Nasdaq: GENZ) is a research leader with sales of almost $3.2 billion on a market cap of $17.1 billion. The company has grown and diversified its business by acquisition, innovation and expansion into global markets. Genzyme primarily serves the renal (kidney failure) market along with the biosurgery and rare disease markets. The company also has 10, late-stage trials scheduled for this year which could add to an already impressive line-up of core products, such as enzyme replacement therapies that have operating margins of over 60%. (For a broader view, read The Ups And Downs Of Biotechnology.)
Genzyme is vertically integrated with a global sales force that translates into expanding economies of scale. There are also growing synergies between diagnostics and oncology treatments. Genzyme's fundamental strategy is to use profits from its core business to fund research and development in oncology, immunology and infectious diseases.
Shareholders have had to face some dilution recently, as employees have exercised options and some past acquisitions have been paid for with stock. Going forward, the company plans to use cash for acquisitions which shouldn't be a problem given its $500 million cash balance.
MedImmune (Nasdaq: MEDI), with a market cap of $13.5 billion, has recently been taken out by the British pharmaceutical giant Astra Zenca PLC (NYSE: AZN) for $58 per share or $15.6 billion, a nice pop from $35 per share. The combined firm will have a solid footprint in infectious diseases and an oncology pipeline. MedImmune has a strong track record for creating vaccine technologies, and it licenses its reverse-genetics technology.
Rather than review the drugs and therapies, let's think about this for a moment: Astra Zenca, with a market cap of $81.5 billion and trading at about 17-times earnings (like most other giant, pharmaceutical firms), bought MEDI that had been trading at 170-times earnings, for what amounts to 282-times earnings. Obviously Astra Zenca was not buying current earnings and has high-hopes for the profit MEDI's pipeline will yield.
The risks associated with these biotech firms are common across the industry: unpredictable FDA approval, unforeseen side effects and competition from rival firms to name a few. Yet, one look at the price-earnings-multiples and the market is obviously acknowledging the promise of things to come.
Investing in these companies on merit alone is risky enough, but depending on a rumored merger or acquisition is pure gambling and an unwise strategy. Future merger and acquisition activity is, of course, anyone's guess.
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