Drug stocks have been a volatile group since the beginning of 2016, with many selling off and still, more than a year later, struggling to recover what they lost. Meanwhile, the broad-based S&P 500 has moved substantially higher.
It's not hard to understand why investors view the drug industry with such skepticism. Most drug developers aren't profitable on a recurring basis, meaning valuations can be prone to wild swings based on the emotions of investors and the clinical data being released. Additionally, there are compounded worries with President Trump now in office. Trump has repeatedly stated his plans to bring down drug prices in America, which would threaten the vital pricing power of drug developers.
Despite this relative underperformance compared to the broader market, a number of juicy drug bargains abound this winter. Here are three cheap drug stocks worth considering for your portfolio.
Personally, this Fool hasn't been the biggest fan of Biogen (NASDAQ:BIIB) in recent quarters, with sales of multiple sclerosis blockbuster Tecfidera slowing down, and opicinumab, a purportedly revolutionary treatment for MS, missing its primary and secondary goals early last year. However, following a reassessment of its pipeline and portfolio, I'm inclined to believe there could be some substantial long-term upside to Biogen's valuation.
With regard to the company's existing portfolio, it's highly dependent on MS, with about $2.2 billion of its $2.5 billion in product sales coming from MS drugs Tecfidera, Avonex, Tysabri, and a handful of other MS therapeutics during the fourth quarter. While being tied to a single disease adds a bit of risk for investors, it also entrenches Biogen as a market share leader in MS, and bolsters the company's ability to raise its prices on an as-needed basis. Leading oral MS drug Tecfidera still managed to grow sales in 2016 by 9% from the previous year, even though sales fell on a sequential quarterly basis in Q4 2016.
The bigger driver, though, is expected to be aducanumab, Biogen's experimental early Alzheimer's disease treatment. To be crystal clear, Alzheimer's disease has one of the highest failure rates in clinical trials of any ailment, meaning not even Biogen is assured of success with aducanumab. However, the clinical data thus far has been nothing short of stellar. In December, Biogen presented phase 1b data that showed dose-dependent improvements in the Clinical Dementia Rating sum of boxes and the Mini-mental State Examination compared to the placebo, as well as statistically significant reductions in amyloid plaque versus the placebo in all fixed-dose arms. While estimates vary, if aducanumab is as successful in a larger-scale study as it's been in phase 1, it could easily become a $10 billion per year drug.
With Biogen potentially offering differentiation with aducanumab, and its hemophilia drug sales on track to generate perhaps $1 billion in 2017, this drug stock is beginning to look cheap based on the growth it could bring to the table.
Another drug stock that continually finds its way back on this list every quarter is Celgene (NASDAQ:CELG), which is primarily focused on finding cures in the oncology, immunology, and inflammation indications.
What makes Celgene so special are its three successful approaches to growing its top- and bottom-line. For starters, unlike most top drug stocks, which have been eager to gobble up other companies in order to expand their product portfolios and pipelines, Celgene's main source of growth has, and continues to be, organic label expansion opportunities, volume growth, and pricing power. Celgene's best-selling drug, Revlimid, tallied nearly $7 billion in sales in 2016. Its consistent double-digit growth is due to patients using the drug for a longer duration of time, as well as a rising prevalence of multiple myeloma diagnoses. Revlimid, and oral anti-inflammatory Otezla, each have quite a few label expansion opportunities with which to expand their revenue streams.
Celgene is also no stranger to collaborations. The company has around four dozen ongoing collaborations in oncology and immunology that allow it to throw its cash flow at only the most promising first-in-class drugs. For instance, its collaboration with OncoMed Pharmaceuticals has the potential to revolutionize cancer treatment if OncoMed's cancer stem cell-focused drugs succeed in clinical studies. Celgene's multiple collaborations gives it a lot of ways to succeed with minimal effort upfront.
Lastly, Celgene does, from time to time, grow inorganically through acquisitions. In 2015, Celgene acquired Receptos for $7.2 billion, getting its hands on next-generation MS drug ozanimod, which may also offer hope as an ulcerative colitis treatment. If approved, ozanimod has peak annual sales potential of $4 billion.
With a minuscule PEG ratio of 0.7, Celgene remains an exceptional cheap top drug stock worthy of consideration by investors this winter.
Teva Pharmaceutical Industries Ltd.
Call it the "homer" pick because it's become a core holding in my portfolio over the past couple of weeks, but hybrid generic- and branded-drug developer Teva Pharmaceutical (NYSE:TEVA) is looking like a top drug stock that's ripe for the picking.
Teva and its shareholders have, of late, been hit by everything but the kitchen sink. Teva has agreed to an overseas bribery settlement, its CEO of three years has resigned, and its top-selling MS drug, Copaxone, is facing the entrance of generic competitors. Combined with weaker sales of newly launched drugs and tamed full-year EPS guidance, Teva's share price has been hammered.
However, Wall Street appears to be overlooking the benefits of Teva's $40.5 billion acquisition of Actavis, which makes Teva the largest generic drugmaker in the world. Being the largest generic drugmaker should improve the company's pricing power on generic medicines while, at the same, allowing it to eliminate redundancies between its generic division and that of Actavis. Teva anticipates as much as $1.4 billion in cost savings annually by 2019, which, when combined with its pricing power improvement and more balanced geographic sales portfolio, could lead to significant EPS growth.
At the same time, I'd opine that the demise of Copaxone has been greatly exaggerated, even with Teva suffering another recent court setback. Teva has done an admirable job of using the courts to keep generic Copaxone off the market, and it's reformulated its injectable MS drug into a three-times-weekly medication, as opposed to once daily. Teva has a decent shot at keeping physicians and consumers on Copaxone, even if generics enter the market.
Valued at less than seven times forward earnings, and sporting a 4.2% dividend yield, Teva is a top drug stock that value and income investors may want to consider picking up this winter.
Sean Williams owns shares of Teva Pharmaceutical Industries. The Motley Fool owns shares of and recommends Biogen and Celgene. It also recommends Teva Pharmaceutical Industries. The Motley Fool has a disclosure policy.