Which Big Biotech Is the Best Bet?

The line between big pharma and big biotech has become increasingly blurry as the four big biotechs have grown up. One started paying a dividend last year; another made an $11-billion purchase. Those aren't characteristics you usually think of in a biotech. There's something for every type of investor here.

Cash galore
Gilead Sciences (Nasdaq: GILD  ) has been steadily throwing off more and more free cash over the past few years as its HIV drug franchises have become the standard parts of drug cocktails used to treat the disease.

Gilead Sciences Free Cash Flow TTM Chart

Gilead Sciences Free Cash Flow TTM Chart by YCharts

But the success has left investors to wonder what the company would do for an encore. Gilead tried heart drugs, with mixed success: darusentan failed and Letairis and Ranexa are growing well, but only make up about 8% of sales.

The move into cancer might pan out, but unless it in-licenses drug on the market, we're a ways off from calling Gilead an oncology company.

It was that plethora of cash that prompted Gilead's $11 billion purchase of Pharmasset. The company had plenty of hepatitis C drugs in its pipeline already, but they were relatively early in the clinic. The company risked a lot with the expensive purchase, but all will be forgiven if Pharmasset's lead compound is approved.

Hey, look, what's that?
(Nasdaq: AMGN  ) is throwing off cash, too -- enough to allow it to start issuing a dividend last August. None of the other big biotechs distributes its cash that way, and I wouldn't expect any of them to start anytime in the immediate future. Longer term, they'll probably all end up offering one if they aren't acquired first.

Amgen is also returning cash in the form of share buybacks. The major decrease in the share count will boost EPS and free cash flow yield, increasing the value of the shares. That's necessary because the potential for substantial earnings growth from new drugs doesn't look all that great.

Part of Amgen's problem is that it's just so big; it's hard to move the revenue needle. On the other hand, it makes the biotech more stable, much like a big pharma.

A takeout candidate?
(Nasdaq: CELG  ) has a few catalyst coming over the next year -- approval of Revlimid as a maintenance therapy in Europe, Abraxane melanoma data, and a few others -- but the event that could cause the largest gains is an acquisition by big pharma. The biotech's nice late-stage pipeline could be very attractive to a large drugmaker looking to replace revenue lost to generic competition.

A growth story again
Sales of Biogen Idec's (Nasdaq: BIIB  ) multiple sclerosis drug Avonex have stagnated of late, but there's growth potential in the rest of its multiple sclerosis drugs.

The risk stratification for Tysabri, which the company sells with Elan (NYSE: ELN  ) , should help drive patients who were otherwise too scared of a rare but potentially fatal brain infection called progressive multifocal leukoencephalopathy, or PML. Tysabri is arguably the best available treatment, and understanding what increases the risk of PML should make patients more comfortable taking the drug if they don't have many of the attributes that increase the risk of taking it.

Biogen is also developing an oral multiple sclerosis drug, BG-12. The drug has performed well in the clinic to date and could capture the newly diagnosed patients who probably wouldn't take Tysabri. BG-12, if it's approved, will cannibalize sales of Avonex a little, but there are plenty of other first-line treatments that it can take market share from as well.

Which one?
Picking the best big biotech is difficult because it depends on your risk tolerance. Amgen doesn't have the most striking growth potential, but the dividend should help the returns and there's less downside risk than with the others. At the other end, Gilead has strong growth potential, but there's a lot built into the expectations that its new acquisition will pan out. Buying in the hopes of a buyout is rarely a good idea, but if you think Celgene is a reasonable value despite the rumors, go ahead and buy. Of the four though, I think Biogen has the best prospects over the next few years, and I like the focus that new CEO George Scangos has brought.

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Fool contributor Brian Orelli holds no position in any company mentioned. Check out his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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  • Report this Comment On January 31, 2012, at 10:14 AM, biotech101invest wrote:

    CELG is definitely the best bet imo. WHY? It has the best EPS growth rate in the ENTIRE S&P 500 - not just biotech and lightyears ahead of other big biotech companies like BIIB & AMGN and yet its PEG ratio is so low - you are right - it could easily be taken out because the EPS growth and the pipeline have ZERO value in the current price and the deal would be accretive even at a big premium. BIIB missed 2012 ests with their guidance today-blamed R&D. CELG has 25 phase 3s & crushed guidance on high end by 30 cents. CELG PEG this yr 0.6 vs BIIB 1.3. 2014 PEG for CELG is 0,4 & for BIIB its 1.0. AMGN PEG 1.2 for 2012 and 1.0 in 2014. CELG's valuation still does not include anything for its EPS growth or its pipeline.

    CELG is now a rare stock that is a growth stock, a momentum stock and is now also a value stock trading at < 1/2 real 2010-2011-2012 EPS growth rate. Key is 20-30 cent beat of consensus has a # of conservative assumptions assures $5.00 EPS, 32% growth trading @ 14 CURRENT YR PE. Can't last.

    CELG PEG (P/E to earnings growth rate) was kept down over the last year because of the bogus side effect issue which is just about gone now. What's amazing about 30 cent beat on the high end of consensus - is that it has a series of very conservative assumptions...

    o Stable share o/s count. In my opinion they will buy back at least $1 billion to $1.5 billion of stock this yr - depending on the timing that could add 20 cents to actual EPS.

    o Generic Vidaza is assumed to start July 1. I once again do not believe there will be generic Vidaza all yr. Not in the bag but could add another 10 cents.

    o Revlimid estimate is at least $200 million low in my opinion. Could be even higher if we get full EU approval and if China sales start in Q4 and if Turkey, Mexico, Brazil, Russia, South Korea sales exceed like I think they will.

    o Tax rate is very conservative.

    o R&D spend is very conservative.

    o Possible Pomalidomide sales and China Revlimid sales in Q4.

    So in my opinion this is an EASY $5.00+ EPS this yr. That's a 32% growth rate trading at a 14 PE on CURRENT YR (and most people look to next yr for PE in PEG). With SPM lifted we should gravitate to AT LEAST a .75 PEG (vs industry standard 1.0) and that would put us at a 24 PE. I think we get there if we get full EU approval. In the meantime my goal is a 20 PE in the first half - which will be possible if we get any of the following:

    1) Overall Survival benefit update in the MM015 trial.

    2) Overall Survival benefit update in the IFM trial.

    3) Halt of the Phase 3 Abraxane Pancreatic Cancer for staggering efficacy which I expect in the first half ahead of expectations.

    4) Halt of the MM020 huge front line Rev-Dex international Ph 3 trial.

    5) Positive Apremilast update in Psoriatic Arthritis or Psoriasis.

    So I think it happens - we can get back to a 20 PE - which is low given our growth rate. Here is where the stock could go if I am right based on a 20 PE and even a 17.5 PE....

    20 PE:

    $4.70-$4.80 current low guidance with stable shr count and other conservative assumptions would bring us to $94 to $96. This could happen if we get full EU approval imo in the first half.

    My $5.00 EPS actual est would bring us to $100. Full EU approval and 1-2 of the other catalysts above and this is achievable IMO by yr end. Michael King's $102 target by yr end is looking more and more possible with a couple of positive catalyst hits.

    17.5 PE:

    $4.70-$4.80 current low guidance with stable shr count and other conservative assumptions would bring us to $82 to $84. This could happen earlier than people think IMO even in Q1.

    My $5.00 EPS actual est would bring us to $87.50. After maybe two beat and raise qtrs this could happen in the summer in my opinion if we hit a few of the catalysts above.

    And if we get most of the catalysts than my 24 PE is not out of the question:

    24 PE:

    $4.70-$4.80 current low guidance with stable shr count and other conservative assumptions would bring us to $112 to $115. This could happen if we get full EU approval, Pancr Cancer halt and good Apremilast data.

    My $5.00 EPS actual est would bring us to $120. A longshot yes but not impossible IF we get almost all of the catalysts above.


    The only thing I am worried about here is that CELG is so cheap on a PEG basis even at $100 + it would be accretive to Big Pharma - which is in DESPERATE need of pipeline - heck Gilead just bought VRUS for $11 billion & its got no revenue - basically on one Ph 3 trial for a drug not even approved yet. Rumors are that Astra Zeneca, GSK, JNJ, Novartis and Amgen have looked at CELG over the yrs - including a GSK rumor last week. I think Novartis and Roche could have a bidding war for CELG. I want them to stay independent - they just raised their 2015 ests to $8 to $9 billion revenue and $8.00 to $9.00 EPS. Personally I think they hit that range in 2014 not 2015. Revlimid will definitely become the biggest selling cancer drug of all time topping Avastin once approved in NHL and once selling starts in China, Mexico, and Brazil. But it could become the biggest selling drug of all time - besting Lipitor if it gets many NHL approvals, CLL and approvals with Rituxan/mab drugs. Revlimid in combination with MAB drugs like Rituxan and Erbitux in many, many indications. Revlimid works in the micro-environment and differently than Rituxan but somehow also increases Rituxan efficacy and also helps Rituxan work again when Revlimid is added after patients fail Rituxan

    PEG ratios 2011........2012......2013......2014

    AMGN 1.3x 1.2x 1.1x 1.0x

    CELG 0.7x 0.6x 0.5x 0.4x (0.4 based on a growth rate that is 10% low and EPS that is $1.00+ low)

    BIIB 1.4x 1.3x 1.2x 1.0x


  • Report this Comment On January 31, 2012, at 10:14 AM, biotech101invest wrote:

    Also Celgene has 10 possible separate and distinct billion dollar a yr opportunities not in current stock price/mkt cap.......


    1) Pomalidomide,

    2) Front Line/Maintenance in EU

    3) Front Line/Maintenance in Asia

    4) Revlimid/Vidaza in China (Merck will have 25% of total revenue from China in 2 yrs) Celgene already profitable in China on Abraxane

    5) Abraxane if Pancreatic Cancer trial halts in 2012 (likely)

    6) Apremilast in Psoriatic Arthritis/Psoriasis

    7) Apremilast in Ankylosing Spondylitis

    8) Apremilast in Rheumatoid Arthritis

    9) Revlimid in NHL/CLL

    10) Revlimid in combination with MAB drugs like Rituxan and Erbitux in many, many indications. Revlimid works in the micro-environment and differently than Rituxan but somehow also increases Rituxan efficacy and also helps Rituxan work again when Revlimid is added after patients fail Rituxan

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