Biotech was hot yet again in 2017. The SPDR S&P Biotech ETF soared more than 43% last year. Many biotech stocks performed even better than that.
For the most part, though, big biotechs didn't enjoy the impressive gains that smaller players did. Amgen (AMGN 1.04%) stock, for example, jumped 19% -- good, but not great for a year like 2017. Celgene (CELG) even lost ground, with its share price tumbling nearly 10% last year. Vertex Pharmaceuticals (VRTX -1.03%) was an exception among big biotechs, with the stock more than doubling in value in 2017.
The past is the past, though. I think Amgen, Celgene, and Vertex look like great stocks to buy in January regardless of their performances over the last 12 months. Here's why.
I like Amgen as a play on the new corporate-tax reform that became effective in 2018. There were plenty of changes, but three in particular should greatly benefit Amgen.
First is the reduction in the corporate tax rate from 35% to 21%. Over three-quarters of Amgen's total revenue is made in the U.S., so this is a big deal for the biotech.
The other two changes are related. Companies can bring cash parked abroad back into the U.S. at a tax rate of 15.5%. Also, a new territorial system will exempt companies from paying U.S. taxes on most foreign profits. Amgen ranks first among healthcare companies, and No. 5 among all U.S. corporations, in terms of cash held in other countries. As of Sept. 30, 2017, Amgen had a little under $39 billion invested outside the U.S.
My view is that Amgen will bring a lot of its overseas cash back home and will use the money in several ways that benefit shareholders. The company already has one of the fastest-growing dividends on the market. I expect another big dividend hike in late 2018. I also suspect Amgen will be busy on the acquisitions scene this year. The right deal could be a nice catalyst for the stock.
Celgene suffered setback after setback in 2017. The company's once-promising Crohn's disease drug GED-0301 flopped in a late-stage study. Celgene missed third-quarter revenue estimates. And it cut its full-year 2017 and long-range outlook.
That's the bad news. What's the good news? Celgene stock is now dirt cheap. Shares trade at roughly 12.5 times expected earnings. It gets even better, though: Celgene thinks it will increase adjusted earnings per share by 19.5% annually over the next few years. Wall Street projections are a little higher. This kind of growth potential gives Celgene stock a price-to-earnings-growth (PEG) ratio of 0.7. Like I said, it's dirt cheap.
Of course, Celgene has to deliver on those growth estimates. I think it will. Blood cancer treatment Revlimid was the second best-selling drug in the world last year and is on track to post double-digit percentage sales growth this year. Pomalyst, another blood cancer drug, continues to enjoy strong momentum.
Celgene's pipeline is also chock-full of potential blockbuster candidates. Ozanimod should win FDA approval later this year in treating relapsed multiple sclerosis. The drug is also being evaluated in a late-stage study for treating ulcerative colitis. With ozanimod potentially on the way and the company's current super-low valuation, I don't expect Celgene stock will stay beaten down for much longer.
The word "vertex" means "the highest point." Despite its sizzling performance in 2017, I don't think Vertex Pharmaceuticals has yet reached its vertex. There are simply too many catalysts on the way.
As a case in point, Vertex expects an FDA approval decision by Feb. 28 for its tezacaftor/ivacaftor combination in treating cystic fibrosis (CF). While no drug approval is a slam dunk, the biotech's data from two late-stage studies of the combo were so impressive that I doubt anyone is betting against approval.
Another possible catalyst this year could come on the reimbursement front. Vertex has been in negotiations with the French government over reimbursement for its already-approved CF drug, Orkambi. Finalizing a deal should mean a boost in revenue for the biotech.
Then there's the longer-term perspective. Vertex plans to soon begin pivotal late-stage studies of its triple-drug CF combos. Earlier studies have been very promising. The potential for triple-drug regimens is a key reason why Wall Street analysts project that Vertex will grow earnings by more than 65% annually over the next five years.
Which of these big biotech stocks is the best bet? I'd go with Celgene.
Amgen should perform well over the long run, although the company faces some headwinds for current products. I really like Vertex and fully expect FDA approval for its tezacaftor/ivacaftor combo. While Vertex stock currently trades at 52 times expected earnings, I'm not worried about that valuation because of Vertex's tremendous growth prospects.
But valuation does matter -- and it gives the advantage to Celgene. In my view, Celgene's attractive valuation combined with its solid product lineup and strong pipeline make it the best big biotech stock to buy in January.