Is time to start sifting through the trash for healthcare stocks?
There's certainly no shortage of beaten-up candidates. You'd run out of fingers and toes to count on if you tried to tally up all of the healthcare stocks that have dropped by 20% or more over the last six months. Some, however, could be ready to mount a comeback. Three of the biggest healthcare losers so far in 2016 are Valeant Pharmaceuticals (NYSE:BHC), Endo International (NASDAQ:ENDP), and Ionis Pharmaceuticals (NASDAQ:IONS). Are these stocks bargains now? Let's take a look.
Valeant's problems didn't start this year, but they haven't gotten any better in 2016. Shares of the pharmaceutical company are down over 75% year to date.
For Valeant, the problems began in 2015 with scrutiny over its drug pricing. Presidential candidate Hillary Clinton even ran a TV ad accusing Valeant of "predatory pricing" and said she was "going after" the company.
Questions also arose about Valeant's relationship with Philidor, a specialty pharmacy that distributed Valeant's dermatology and opthalmology products. Valeant ultimately announced last Oct. 30 that it was severing all ties with Philidor. But that move left the drugmaker scrambling to find another distributor. Valeant quickly struck a deal with Walgreens Boots Alliance (NASDAQ:WBA) to fill the gap, agreeing to slash its prices.
This transition to a new distributor with reduced pricing came with its own set of problems that carried over into 2016. Sales of dermatology products in the first quarter of this year plunged 43% year over year. Ophthalmology product sales fell 30% compared with the prior-year period. The continued streak of bad news has led Valeant to cut its full-year 2016 outlook two times in a row.
Valeant expects to be profitable in 2016. The company now has a new CEO with a great track record. Its pipeline looks good, too, with 18 products in late-stage studies.
Shareholders of Endo International have experienced a miserable 2016 thus far. The specialty pharmaceutical company's stock has plunged over 70% year to date after several rounds of bad news.
In late February, Endo announced that it would close its Astora Women's Health division because of product liability concerns. Endo had tried unsuccessfully to find a buyer for the business unit. The company also announced fourth-quarter results that showed weakness in its U.S. generic business due in large part to increased pricing pressures from competition.
That's just the beginning. In March, Endo felt the need to respond to the likelihood that the FDA would approve a generic version of Endo's Voltaren Gel, which generated over $207 million in sales during 2015. This earlier-than-expected regulatory approval contributed to Endo's slashing of its full-year 2016 guidance when the company announced its first-quarter results on May 5.
So where does all of this leave Endo now? The company is still growing revenue and expects to be profitable this year. However, the outlook for the U.S. generics market remains pretty bleak. Endo must also service a debt load of over $8.5 billion.
Endo hopes to turn things around by re-establishing growth in its branded-pharmaceuticals business and focusing on its generic-drug pipeline and sterile injectable products. Branded pharmaceuticals should be helped by increasing sales of Xiaflex, a treatment for Dupuytren's contracture, and new chronic-pain drug Belbuca. Endo also has some bright spots in its generic-drug pipeline, with plans to launch around 30 new generic drugs this year and submit between 25 to 30 generics for approval.
Shares of Ionis are down around 65% year to date. Much of the downward pressure on the stock came from GlaxoSmithKline's (NYSE:GSK) decision to hold off initiating a planned phase 3 study of IONIS-TTRrx in treating patients with TTR amyloid cardiomyopathy. Glaxo has an option for an exclusive license to IONIS-TTRrx.
Glaxo was spooked by safety concerns that led the FDA to put a clinical hold on the planned phase 3 study. The FDA also placed an investigator-initiated phase 2 clinical study on hold. Glaxo opted to wait on results from that phase 2 study and from another study of IONIS-TTRrx being conducted by Ionis.
While this news pummeled Ionis' shares, the biotech still has plenty of reason to hope better days are ahead. There's a decent chance that Glaxo will move forward with the delayed phase 3 trial once more data is available from the other studies in progress. Also, Ionis isn't dependent only on IONIS-TTRrx.
Ionis regained rights for homozygous familial hypercholesterolemia drug Kynamro earlier this year. The biotech soon licensed those rights out to privately held Kastle Therapeutics. Ionis expects results from late-stage studies for nusinersen and volanesorsen in the first half of 2017. Two other drugs, antibiotic plazomicin and cancer drug custirsen, are in late-stage studies with Ionis' partners. Ionis' pipeline also includes 12 other drugs in phase 2 clinical trials and six candidates in phase 1 studies.
While Valeant and Endo must deal with mountains of debt, Ionis' balance sheet looks pretty good. The biotech has over $723 million in cash, including cash equivalents and marketable securities, with less than $479 million in debt.
Are these beaten-down healthcare stocks now in the bargain bin? Both Valeant and Endo are trading at roughly three times forward earnings. If they stop the bleeding on the bottom line (which I think they will), they both belong in the bargain category.
And while Ionis isn't profitable right now, my hunch is that the stock might be in the best position to rebound over the next year or so. The biotech's numerous phase 3 studies should provide positive catalysts. I wouldn't bet against Glaxo eventually moving forward with IONIS-TTRrx, either.
Valeant faces tough challenges, but the company has made some steps in the right direction. I'd put hiring Joseph Papa as CEO at the top of the list. Papa recently bought nearly $5 million worth of Valeant stock. I like that he's staking a significant chunk of his own money on the company's success.
Endo recently got a vote of confidence, with investment firm Mizuho upgrading the stock from underperform to neutral. I think Mizuho's call is the right one for now. A coming wave of new products could help Endo turn things around -- maybe not this year but in the not-too-distant future.
Valeant, Endo, and Ionis are battered and bruised right now. However, I suspect that five years from now, we will look in the rearview mirror and see that all of these stocks were bargain buys at current price levels.
Keith Speights has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Ionis Pharmaceuticals and Valeant Pharmaceuticals. 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.