Like most investors, I love a good bargain. So when the top pharma stocks Celgene Corporation (CELG +0.00%) and GlaxoSmithKline plc (GSK 0.06%) both crashed last week, it definitely caught my attention.
Just because a stock sells off in dramatic fashion, however, it doesn't necessarily mean you should rush out and start gobbling up shares. Sometimes steep pullbacks are, in fact, justified -- meaning that it's perhaps best to proceed with caution, instead of trying to catch a proverbial falling knife.
In the case of Celgene and GlaxoSmithKline, though, I firmly believe these two "falling knives" are indeed worth the risk for long-term investors. Here's why.
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Celgene: Best-in-class
Celgene's market cap fell by approximately $40 billion over the past few weeks in response to both the late-stage failure of its experimental Crohn's disease treatment, GED-0301, and a disappointing third-quarter earnings report that featured a marked downward revision to the company's 2020 revenue forecast.
On the one hand, this pronounced sell-off could be viewed as a reasonable turn of events. Celgene's shares, after all, have been garnering one of the highest-premiums within its large cap peer group for several years running, thanks to its blistering revenue growth. So a key clinical miss, combined with the slowing sales of major drugs like Abraxane and Otezla due to new competitive threats, are arguably justifiable reasons to hit the panic button.
On the flip side, Celgene's turbulent October should probably be taken with a rather large grain of salt. The pharmaceutical space is well-known for its volatility in terms of sales, competition, and clinical/regulatory events, and most importantly, Celgene has the clinical assets to more than overcome these headwinds to continue delivering top notch levels of growth moving forward.
Suffice to say, Celgene has one of the best clinical pipelines in the game. The biotech, after all, has already started to file regulatory applications for its next megablockbuster candidate, ozanimod, as a treatment for relapsing multiple sclerosis, and its external licensing deals with bluebird bio., Jounce Therapeutics, and Juno Therapeutics give it a plethora of high-value assets in immuno-oncology.
So, in my view, the market isn't fully appreciating the value of either ozanimod or Celgene's vast immuno-oncology pipeline right now -- making this beaten-down biotech an outright steal at current levels.
Glaxo: Don't worry about the dividend
Glaxo's shareholders revolted last week after CEO Emma Walmsley expressed interest in possibly acquiring Pfizer's (PFE 0.89%) consumer health unit if it became available via a spin-off or an outright sale.
The big ticket item is that such an acquisition would cost around $10 billion according to industry insiders. As Glaxo currently sports one of the highest trailing dividend payout ratios within the healthcare sector, this mid-sized acquisition is almost certainly going to result in a sizable reduction of the drugmaker's rather rich 5.48% yield going forward.
Beyond a possible dividend reduction, investors also seem to be concerned about Glaxo's focus under Walmsley. As a reminder, Walmsley was the former head of Glaxo's consumer healthcare unit, which has spurred fears on the Street that the company's struggling pharma division may take a backseat to other, less profitable, ventures under her stewardship. And this talk of acquiring Pfizer's consumer healthcare business doesn't help matters quite frankly.
However, I think these concerns are largely overblown. The fact of the matter is that Glaxo's pharma pipeline is unlikely to produce any major top line readouts until 2020; so a dividend reduction was probably going to happen anyway.
Glaxo's new shingles vaccine, after all, can't produce the kind of sales capable of returning the drugmaker to healthy levels of growth in the near-term. But the acquisition of Pfizer's consumer business can, at least, bridge the gap until Glaxo's next batch of major pharma candidates come online, so to speak.
Personally, I have a favorable view of Walmsley's measured approach to top line growth that relies on all three of the company's business segments (pharma, vaccines, and consumer healthcare) to boost sales. Glaxo's enormous expenditures on pharma R&D in the past have flat out failed to right the ship after all, meaning that a change of direction is probably appropriate at this stage.
