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Biotech Bulls For July 14
New products and exciting discoveries make biotechnology a fun and interesting place to invest; however, the risks are higher than in most other sectors, and it takes a lot of research to track down the potential winners.
For example, when researching a firm in the oil sector, it's relatively simple to calculate the value of the company by looking at the oil reserves it has available. It is very difficult, on the other hand, to determine how popular a drug may be once it is developed, or even predict whether the drug will make it out of its development stages. These companies often have little or no income, and so are difficult to value by traditional methods such as the price-to-earnings ratio. What we can do, however, is evaluate the validity of a firm's new drug once clinical trials have taken place. This may take a bit more homework than you are used to, but if this is a sector you are interested in including in your portfolio, the added work is a must.
Obviously, once a company has started earning money, it can be valued the same as you would one in another sector. (For a systematic way to pin a price on potential, read Using DCF In Biotech Valuation.)
Lets take a look at five companies in this sector, and see if there is one that is ready to be invested in today.
Earnings Please
As mentioned in the beginning of this article, if there are no earnings to be seen, much more research must be undertaken to determine why a company is worth the price it is trading at. For the purposes of this article (in which we do not have the time or room to go into that detail), we will steer clear of those companies without positive earnings. Because both Elan Corp. and Enzo Biochem are both losing money, we will look a bit closer at Wuxi Pharmaceuticals, King Pharmaceuticals, and Novartis, that have earnings per share of 56 cents, 63 cents, and $5.24 respectively. Of these three, Novartis is obviously earning the most per share, and more importantly, you can buy those earnings for the best value. Trading at only 11-times earnings, Novartis leaves Wuxi, and King in the dust. Wuxi and King have price/earnings ratios of 36, and 17 times earnings, respectively.
From People to Pets, Novartis has the Edge
Novartis is a diversified healthcare solutions provider, with a stake in many different areas of biotech and pharmaceuticals. For example, not only does it provide drugs and medical devices for almost every aspect of human need (i.e. therapy, vaccination, diagnostics, and vision), it also has an animal division that provides veterinary products for farm and household animals. In a slowing global economy, it is this diversification that draws my interest.
Another good thing to notice when researching Novartis is its balance sheet. As of December 31, 2007 the company actually had over $1 billion more in current assets than total liabilities! Low debt is an excellent thing to have in our economy as of late. With over $75 billion in total assets, Novartis has the resources required to grow, and growth via acquisition seems to be the name of the game. Novartis recently snapped up Speedel to help its gain a foothold in the hypertension market, which is one of the fastest growing areas of pharma. (To add a dash of technical analysis to you biotech research, read The Ups And Downs Of Biotechnology.)
Add Your Two Cents
What do you think will happen with Novartis going forward? Will a diversified approach help Novatris leverage it's already solid footing in this slowing economy? Be sure to join me (aytonmm) in the FREE Stock Picking Community to share your thoughts and see what other investors are saying.
For further reading, be sure to check out Chasing Down Biotech Zombie Stocks.
For example, when researching a firm in the oil sector, it's relatively simple to calculate the value of the company by looking at the oil reserves it has available. It is very difficult, on the other hand, to determine how popular a drug may be once it is developed, or even predict whether the drug will make it out of its development stages. These companies often have little or no income, and so are difficult to value by traditional methods such as the price-to-earnings ratio. What we can do, however, is evaluate the validity of a firm's new drug once clinical trials have taken place. This may take a bit more homework than you are used to, but if this is a sector you are interested in including in your portfolio, the added work is a must.
Obviously, once a company has started earning money, it can be valued the same as you would one in another sector. (For a systematic way to pin a price on potential, read Using DCF In Biotech Valuation.)
Lets take a look at five companies in this sector, and see if there is one that is ready to be invested in today.
| Company | One Month Gain* |
Market Capitalization |
|
Elan PLC (NYSE:ELN) |
32.9% |
$16 billion |
|
Enzo Biochem (NYSE:ENZ) |
16.5% |
$489 million |
|
Wuxi Pharmatech (NYSE:WX) |
15.1% |
$1 billion |
| King Pharmaceuticals (NYSE:KG) |
14.6% |
$3 billion |
|
Novartis AG ADS (NYSE:NVS) |
13.4% |
$128 billion |
| Data as of market close July 11, 2008 | ||
Earnings Please
As mentioned in the beginning of this article, if there are no earnings to be seen, much more research must be undertaken to determine why a company is worth the price it is trading at. For the purposes of this article (in which we do not have the time or room to go into that detail), we will steer clear of those companies without positive earnings. Because both Elan Corp. and Enzo Biochem are both losing money, we will look a bit closer at Wuxi Pharmaceuticals, King Pharmaceuticals, and Novartis, that have earnings per share of 56 cents, 63 cents, and $5.24 respectively. Of these three, Novartis is obviously earning the most per share, and more importantly, you can buy those earnings for the best value. Trading at only 11-times earnings, Novartis leaves Wuxi, and King in the dust. Wuxi and King have price/earnings ratios of 36, and 17 times earnings, respectively.
From People to Pets, Novartis has the Edge
Novartis is a diversified healthcare solutions provider, with a stake in many different areas of biotech and pharmaceuticals. For example, not only does it provide drugs and medical devices for almost every aspect of human need (i.e. therapy, vaccination, diagnostics, and vision), it also has an animal division that provides veterinary products for farm and household animals. In a slowing global economy, it is this diversification that draws my interest.
Another good thing to notice when researching Novartis is its balance sheet. As of December 31, 2007 the company actually had over $1 billion more in current assets than total liabilities! Low debt is an excellent thing to have in our economy as of late. With over $75 billion in total assets, Novartis has the resources required to grow, and growth via acquisition seems to be the name of the game. Novartis recently snapped up Speedel to help its gain a foothold in the hypertension market, which is one of the fastest growing areas of pharma. (To add a dash of technical analysis to you biotech research, read The Ups And Downs Of Biotechnology.)
Add Your Two Cents
What do you think will happen with Novartis going forward? Will a diversified approach help Novatris leverage it's already solid footing in this slowing economy? Be sure to join me (aytonmm) in the FREE Stock Picking Community to share your thoughts and see what other investors are saying.
For further reading, be sure to check out Chasing Down Biotech Zombie Stocks.
by
Ayton MacEachern
Ayton MacEachern is an Equity Trader, previously working as the Senior Financial Editor at Investopedia.com. After receiving his bachelor's degree in financial services from Mount Royal College in Calgary, Alberta, MacEachern began his career at an international securities trading firm. MacEachern has worked in a variety of roles in the financial industry, including workers' compensation insurance underwriting, financial planning, and equity, currency and options trading. MacEachern is also Co-Founder of theskipper.ca, a source for online outdoor education.
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