Image source: Getty Images.
The biotechnology Industry has been beaten up pretty badly over the past year. Less than encouraging news from Gilead Sciences (GILD 0.28%), Ionis Pharmaceuticals (IONS 0.96%), Biogen (BIIB -0.14%), Celgene (CELG), and Portola Pharmaceuticals (PTLA) has led to what I feel are overreactions.
While Wall Street is hung up on short-term pessimism, walk with me through some figures for these five biotech stocks. I think you'll agree their bargain-bin prices are just plain crazy.
1. Gilead Sciences: Best in breed
Overall sales of Gilead's hepatitis C drugs have flatlined, but its recent price of about 7 times this year's earnings estimates is silly for several reasons: The easiest to understand is its 14.3% earnings yield (earnings divided by price) is a few points above the S&P 500's historical average. This means earnings could remain flat into eternity and you would still beat the broad market holding this stock.
Image source: Gilead Sciences.
So the only reason not to buy is that you expect earnings to fall. First-quarter Harvoni sales did slide 15.7% compared to Q1 2015, to $3.0 billion. However, growth of nearly every other product in the company's lineup more than offset the loss, leading to total product sales growth of 3.7%, to $7.68 billion.
There are six main strains of Hepatitis C virus, and by the end of the month the FDA is expected to announce a decision regarding Gilead's combination pill intended to treat them all. This would make the costly genotyping process, often unavailable in developing nations, unnecessary.
Outside of hepatitis, Gilead's first TAF-based HIV combo, Genvoya, earned approval last November and reached sales of $158 million in the first quarter. The company's second, Odefsey, earned FDA approval in March.
With $17.8 billion in trailing free cash flow, the company can buy its own stock or invest in promising candidates internally or externally. Either way, I expect Gilead's earnings to rise steadily over the long term.
2. Ionis Pharmaceuticals: The bigger picture
Ionis shares have been hammered over 60% this year. The latest beating took place after GlaxoSmithKline decided to postpone a planned phase 3 trial with IONIS-TTRrx for treatment of heart-debilitating symptoms associated with a rare inherited metabolic disease, transthyretin-related amyloidosis. Association of low platelet levels -- a symptom that is concerning but manageable -- spooked the Big Pharma partner.
Glaxo is going to wait for results from another phase 3 trial with the same drug for treatment of nerve damage, expected next year. While they're waiting, Ionis has dozens of clinical-stage candidates with numerous partners.
Image source: Ionis Pharmaceuticals.
The company's Biogen-partnered candidate, nusinersen, for treatment of spinal muscular atrophy, which is the leading genetic cause of infant mortality, is also in a pivotal trial. If approved, it could provide a genetic "cure" for the debilitating disease.
Ionis has plenty of other smaller irons in the fire, too. All in all, Ionis' market cap of about $2.7 billion severely undervalues this biotech stock's long term potential.
3. Biogen: One missed moonshot
Biogen shares have given up over 40% in the past year. The market reaction to the slowdown of Biogen's once-rocketing multiple sclerosis pill, Tecfidera, was harsh but somewhat warranted. However, I think the reaction to the more recent trial failure that hacked about $10 billion off the company's market cap was overdone.
Multiple sclerosis drug opicinumab, formerly anti-LINGO, is supposed to repair the myelin sheath that surrounds the longer parts of nerve cells and allows for rapid signal transduction that we all take for granted. Multiple sclerosis is largely a result of immune-system attacks on myelin, and repairing it seemed like a way to reverse the damage. The drug failed to score a goal in the phase 2 trial, but it's not completely out of the game. In an earlier trial, it did show improvement in signal transduction in eyeball nerves.
Image source: Biogen.
Opicinumab aside, I put a much higher value on the company's Alzheimer's pipeline, with phase 3 candidate aducanumab an important component of a larger program. Along with many experts in the field, I believe a combination of drugs will be necessary to effectively treat the complex disease. No other company has amassed a stable of Alzheimer's candidates as impressive as Biogen's, and in the long run I believe it has a better chance than any single company of succeeding in this space.
Biogen is trading at about 12.5 this year's sales estimates. That's ridiculously cheap for a company that recently reported first-quarter earnings-per-share growth of 27% over the same period last year. Factor in its intention to spin off its successful hemophilia business into a separate entity, and its price is just crazy low.
4. Celgene: Poised for growth
When Celgene last reported earnings, it was expecting data from a staggering 18 late-stage trials over the next two years. Few drugmakers twice its size can boast of a pipeline so impressive.
One reason Celgene has been able to punch above its weight is through a mind-boggling array of collaborations and outright acquisitions. There's hardly a company developing next-generation cancer or anti-inflammatory treatments that Celgene isn't invested in.
Image source: Celgene.
One reason for Celgene's drive is heavy reliance on its lead therapy Revlimid. Although the FDA first approved it in 2005, sales of the drug are expected to reach about $6.7 billion this year, up 15.5% from last year. While its continued growth is impressive, it's also expected to make up about 60% of the company's total sales this year.
Of couse, like all drugs, Revlimid will eventually see its patent expire. However, I expect Celgene will be able to offset gradual generic competition for Revlimid sales beginning in 2022 through a limited volume settlement with one of Allergan's subsidiaries.
Celgene is well on its way to meet its own growth estimates from about $11 billion this year to over $21 billion in total revenue by 2020. The company has been using its massive cash flows to purchase more drug candidates, it's reduced its share count by 15.8% over the past five years, and it recently authorized another $3 billion in buybacks, or about 4% of its current market cap. With fewer shares outstanding, plus expanding margins, management expects earnings to rise even faster than sales to about $13 per share by 2020.
Given the growth expected over the next several years, and the myriad of earlier-stage pies Celgene has its fingers in, its recent price of less than 20 times this year's expected earnings is just silly.
5. Portola Pharmaceuticals: Stopping clots
Pneumonia, stroke, heart failure, and increasingly common hip and knee replacement surgery can lead to formation of blood clots in larger veins that break loose and then get stuck in a smaller blood vessel -- someplace dangerous, such as a lung, the heart, or the brain. This condition, called venous thromboembolism (VTE), occurs about 900,000 times in the U.S., resulting in about 44,000 deaths each year.
Johnson & Jonhson's Xarelto and Bristol-Myers Squibb's Eliquis are oral factor Xa inhibitors that prevent VTEs. Both pills are on pace to record over $2 billion in sales this year, but neither is approved for the precise indication of "extended thromboprophylaxis in acutely ill patients," an indication Portola is aiming for with its own experimental factor Xa inhibitor, betrixaban.
Image source: Portola Pharmaceuticals.
Typically, these "acutely ill" patients are treated with Lovenox injections in the hospital for a couple of weeks or less and then sent home. Portola ran a study with over 6,200 patients receiving either betrixaban for 35 days or Lovenox injections for 10 to 14 days. The overall results show betrixaban significantly reduced the number of VTEs, but there's a catch. In patients with elevated risk of clot formation, a lower percentage of patients experienced VTEs, but not low enough to be considered statistically significant.
Following the release of top-line results from the trial in March, the market shaved about $650 million off Portola's market cap, and the stock has since recovered somewhat to a total market cap of $1.38 billion.
Betrixaban had already received an FDA fast-track designation, and following a pre-application meeting, the company said the designation was reconfirmed.
While an approval for this indication would set the the company's factor Xa inhibitor apart from its Big Pharma peers, Portola has another drug under review at the agency that could also be a big hit. You see, these factor Xa inhibitors sometimes cause bleeding episodes. Portola's Andexxa, if approved, would be the only available "antidote" capable of quickly reversing the effects of these drugs.
WIth betrixaban alone, a market cap of just $1.38 billion seems a bit low for Portola, but add in Anexxa's potential and it's downright ludicrous.
