The Fastest-Growing Biotech Stocks

Why are investors willing to pay only 10 times earnings for some stocks, but 20, 50, even 100 times earnings for others?

The short answer: growth. Companies that can grow their earnings meaningfully could make lofty current P/E ratios look cheap in hindsight.

Of course, any company can promise a rosy, growth-rich future. Figuring out which companies can actually deliver is far trickier. In this series, I take the first step by identifying companies that have put up the best growth track records in their respective sectors.

Below, I've listed the top sales growers in biotechnology over the last five years. Here's how to interpret each data column.

  • Five-year sales growth: I rank each company's sales growth, to capture its pure trailing expansion without regard to the vagaries of earnings.
  • Five-year EPS growth: Since sales growth means nothing if it doesn't ultimately fall to the bottom line, I've also included each company's five-year trailing EPS growth rate.
  • Five-year analyst estimates: This column shows us how much EPS growth analysts expect over the next five years. Just keep in mind that analysts tend to grossly overestimate a company's prospects.
  • Five-year ROIC range: Return on invested capital basically shows you how efficiently a company is converting its debt and equity into profits. We want companies that can do a lot with a little. By looking at the five-year range, we can start to gauge both the power and the consistency of a company's profit engine.

Company

5-Year Sales Growth

5-Year EPS Growth

5-Year Analyst Estimates

5-Year ROIC Range

Onyx Pharmaceuticals (Nasdaq: ONXX  ) 365.5% NM 32.6% (14.7%) / 0.3%
Dendreon (Nasdaq: DNDN  ) 261.9% NM (31.0%) (38.1%) / (24.4%)
Spectrum Pharmaceuticals (Nasdaq: SPPI  ) 233.8% NM N/A (60.0%) / 21.3%
Alexion Pharmaceuticals (Nasdaq: ALXN  ) 233.2% NM 36.2% (37.7%) / 13.4%
Theratechnologies 179.4% NM N/A (37.2%) / 7.4%
Halozyme Therapeutics (Nasdaq: HALO  ) 167.7% NM N/A (749.8%) / (27.0%)
Targacept (Nasdaq: TRGT  ) 126.2% NM 32.8% (29.7%) / 4.8%
Pharmacyclics (Nasdaq: PCYC  ) 114.6% NM N/A (126.2%) / (26.3%)

Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful; EPS growth that is NM results from losses during the period. N/A = not applicable; analyst estimates that are N/A result from lack of analyst coverage.

Use the table above as a first step to help you generate ideas for your own further research. Once you identify stocks worth a closer look, the following three steps will help you further assess their growth prospects:

  • Carefully study the table for possible danger signs, such as high sales growth but low EPS growth, analyst growth expectations significantly trailing past growth, and low ROIC figures. Then follow the trail.
  • Find out how the company achieved its prior growth: organically or via acquisition? Can it sustain that previous growth?
  • Pay attention to how management plans to implement its growth plans. Does its strategy seem prudent and plausible to you?

Remember: The more profitable, efficient, and predictable growth a company can achieve, the more we investors should be willing to pay.

Learn more about any of the stocks that interest you by adding them to our My Watchlist tool. You'll get access to all the latest Motley Fool analysis, organized by company.

Anand Chokkavelu owns shares of Dendreon. The Motley Fool owns shares of Dendreon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 05, 2011, at 11:52 AM, rsinj wrote:

    I'm sorry, but this article is complete garbage and next to worthless. It is a prime example of why these Fool authors writing cookie cutter templates where they just plug in companies and numbers with identical verbiage falls down. They put absolutely no work into even realizing what the end result of what they've written is. And, here you get a big laugh because it makes no sense and the author makes himself look not like an expert, but literally stupid.

    Anand, did you even read your end product or look at the financials seeing how the words make no sense? Read your first two paragraphs - no sense because no earnings...you cop out with NM. How about putting the negative number to see how much money they are losing? Or what the sales numbers are? Growth/percentages are relative and that hides important information.

    Let's take PCYC...5 year sales growth of 114%? Total sales are only $8 million - does that even register? ROIC range? How about this - they are losing money hand over fist at $35 million. How about that metric...for every $1 in sales, they lose $4.30. Oh...and let's not forget the growth number since you like that...quarterly sales growth (year over year) negative 44%.

    Anand, same recommendation to you as all the other Fool authors who write one article and then copy/paste article after article...try doing a little work, because otherwise you provide no value and waste peoples time.

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