The biotech industry is well known as a minefield for investors. For a company to succeed, it needs strong compounds or proceedures that make a difference in treating or curing diseases, and it needs the financial backing to see its products through clinical trials to eventually reach the market. With so many potential pitfalls between concept and market, it's tough to pick a winner. To help cut through the clutter, we asked three investors which biotechs look like they be worth buying right now. They picked Celgene (NASDAQ:CELG), Amgen (NASDAQ:AMGN), and Regeneron Pharmaceuticals (NASDAQ:REGN).
In better shape than the market thinks
Keith Speights (Celgene): It wasn't too long ago that Celgene was a darling in the investment community. That's no longer the case. Over the past six months, Celgene stock has plunged more than 30%.
Several factors caused the big biotech's woes. A once-promising Crohn's disease drug flopped in a late-stage clinical study. Its fast-growing drug Otezla faced challenges. Celgene lowered its financial outlook for 2020. And, most recently, the company botched its regulatory filing for multiple sclerosis (MS) drug ozanimod.
Largely because of these problems, the market seems to think that Celgene is in horrible shape. But it really isn't. The biotech still claims a compelling growth story, with adjusted earnings per share expected to increase by more than 19% annually on average over the next few years.
Celgene's current lineup, featuring blood cancer drugs Revlimid and Pomalyst, continues to perform very well. Those challenges for Otezla aren't slowing the successful psoriasis and psoriatic arthritis drug down very much. And while Celgene committed an unforced error with its FDA submission for ozanimod, the delay in approval of the drug should only be temporary. This MS drug still appears likely to become a megablockbuster for Celgene. The biotech's pipeline is also loaded with other potential winners.
With shares trading at only nine times expected earnings, Celgene stock is dirt cheap. All it should take is a round of inevitable good news for the market to realize what a bargain this beaten-down biotech stock really is.
George Budwell (Amgen): Amgen's stock has more than tripled in value over the last decade, thanks to a generous shareholder rewards program and a slew of highly successful product launches in oncology, neuroscience, and cardiovascular care. The company's latest earnings report for the fourth quarter of 2017, though, suggests that the good times may be coming to an abrupt end.
Amgen's highly touted cardiovascular drugs Corlanor and Repatha, after all, have failed to pick up the slack emanating from legacy products like Enbrel, Neulasta, and Neupogen. As a result, the biotech's top line is expected to slightly dip this year and essentially come in flat next year.
Despite these near-term headwinds, though, I think Amgen is actually a compelling buy right now for one clear reason: Amgen has around $70 billion in total deal-making capacity (cash, debt vehicles, free cash flows) at the moment.
While the biotech may choose to use a portion of its $41.7 billion in cash to pay down its sizable debt load of over $35 billion, Amgen should still have enough financial firepower to be a top player in the biotech M&A, even after addressing its outstanding debt issue. By doing so, Amgen should be able to quickly restart its flagging growth engine and bolster its middling clinical pipeline at the same time.
Once this inevitability does happen, Amgen's near- and long-term growth prospects will likely improve -- perhaps drastically so -- arguably making this top biotech stock an attractive buy right now.
"Make great medicine. And then do it again and again."
Chuck Saletta (Regeneron Pharmaceuticals): The home page of Regeneron Phamaceuticals shares a great objective for the company: "Make great medicine. And then do it again and again." It prides itself as being led by its physician-scientists and views its focus on the medicine as a differentiator that sets it apart from its competition.
That focus means it's willing to keep a robust pipeline going, despite the tremendous costs of research and running clinical trials. Ultimately, it's a solid pipeline that allows a company in the biotech industry to continue to grow and profit.
In Regeneron's case, the company's profits are expected to grow nicely over the next year, to the point where it is trading at a mere 16.4 times its expected forward earnings. As if that weren't enough, analysts are expecting its earnings to grow by better than 12% annualized over the next five or so years. That combination of expectations for a brighter future gives patient investors the opportunity to profit, despite the company's stock price slump over much of the past year.
Plus, with more cash than debt on its balance sheet and strong cash flows underpinning its existing operations, the company has a solid foundation to enable it to keep that research machine going. That gives investors a reason to believe in an even longer-term successful trajectory for the company.
Often, the time to buy a great business is when its solid prospects are not fully reflected in its market price. With its shares down over the past year to the point where they now look like a decent value, now might very well be a decent time to consider an investment in Regeneron Pharmaceuticals.
Chuck Saletta has no position in any of the stocks mentioned. George Budwell has no position in any of the stocks mentioned. Keith Speights owns shares of Celgene. The Motley Fool owns shares of and recommends Celgene. The Motley Fool has a disclosure policy.