Biotech stocks aren't usually known for being great bargains. In many cases, biotechs command premium valuations. But that's not the case for two big biotechs.
Both AbbVie (ABBV 0.25%) and Celgene (CELG) have seen their stock prices fall significantly. These big biotechs now claim really low earnings multiples, but still offer strong growth prospects. Here's what you need to know about these big biotech bargains that you can buy right now.
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Why they're beaten down
AbbVie's share price is down more than 20% over the last three weeks. Celgene stock has fallen close to 40% during the past six months. Both of the companies have stumbled because of bad news.
A clinical setback for rovalpituzumab tesirine (Rova-T) as a third-line treatment for relapsed/refractory small cell lung cancer (SCLC) caused AbbVie's decline. On March 22, the company announced that it wouldn't seek accelerated approval for Rova-T due to disappointing efficacy for the drug. AbbVie has two late-stage clinical studies in progress evaluating Rova-T as a first-line and second-line treatment for SCLC.
Failure in the third-line setting, though, casts doubts about how well Rova-T will perform in the phase 3 studies targeting earlier lines of SCLC. AbbVie in the past has mentioned peak annual sales potential for Rova-T in the ballpark of $5 billion.
Celgene, meanwhile, has had a string of bad news. Once-promising Crohn's disease drug GED-0301 failed in a late-stage study. The biotech missed 2017 Q3 revenue projections in October due to lower-than-expected sales for psoriasis and psoriatic arthritis drug Otezla. At the same time, Celgene cut its full-year 2017 and longer-term 2020 outlooks.
Perhaps the most stunning problem for Celgene, though, was that it received a Complete Response Letter from the U.S. Food and Drug Administration (FDA) for its New Drug Application (NDA) for ozanimod in treating multiple sclerosis. Receiving this kind of rejection is rare for a big biotech like Celgene, which investors expect to have its act together in regulatory filings.
Market research firm EvaluatePharma projected last year that Rova-T would be the No. 4 biggest new drug launched in 2018, with ozanimod coming in at No. 5. And, based on their potential, they should have been. Now, neither drug will launch this year. The chances for Rova-T to make it to market at all are now in doubt. Ozanimod seems likely to eventually win FDA approval, but it will be much later than Celgene counted on.
Why they're bargains
Because of these factors, AbbVie stock now trades at 10.6 times expected earnings. Celgene's forward earnings multiple is only 8.7. Both biotech stocks are cheap. But are they really bargains? I think so.
There's still a chance that Rova-T will be successful in late-stage studies. Even if not, though, AbbVie has several other avenues for growth. Imbruvica should be on its way to becoming one of the biggest cancer drugs on the market. Venclexta is another oncology asset that has a lot of potential for AbbVie.
The company claims several pipeline candidates that could become blockbusters over the next few years. AbbVie hopes to win approval for elagolix in treating endometriosis this month. It plans to file for regulatory approval of upadacitinib in treating rheumatoid arthritis in the second half of 2018. AbbVie is also evaluating immunology drug risankizumab in late-stage studies.
Celgene, too, has both current drugs and pipeline candidates that should drive growth for years to come. Blood cancer drugs Revlimid and Pomalyst continue to show strong sales momentum, as does Otezla. The setback for ozanimod should only be temporary.
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Several other drugs in Celgene's pipeline have blockbuster potential. The company expects to submit fedratinib for FDA approval in mid-2018 for treatment of myelofibrosis. Experimental hematology and oncology drugs luspatercept, CC-486, and BGB-A317 are the most promising late-stage assets.
Prior to the Rova-T setback, AbbVie expected to generate risk-adjusted non-Humira sales of $35 billion by 2025. Excluding Rova-T, the company's projection would be around $30 billion. Even if AbbVie's calculation is still too optimistic, the biotech should be able to grow considerably over the next few years.
Celgene's growth potential looks even better. The loss of GED-0301 hurt, but it wasn't crippling. Celgene should be able to grow adjusted earnings by around 19% annually through 2020. The company has plenty of catalysts for growth well into the next decade as well.
Is there a catch?
It only makes sense to wonder if there's a catch with biotech stocks like AbbVie and Celgene that are cheap yet still have great growth prospects. And there is a similar catch for each of these companies.
Both AbbVie and Celgene remain highly dependent on one drug. Humira generates 65% of AbbVie's total revenue. Revlimid contributes 63% of Celgene's total revenue. Both Humira and Revlimid face the prospects of loss of exclusivity.
How big are the risks that the two biotechs will soon lose a huge amount of revenue? My view is that both AbbVie and Celgene should be in pretty good shape.
AbbVie struck a deal with Amgen last year that keeps Amgen's biosimilar version of Humira off the U.S. market until early 2023. Celgene reached an agreement a few years ago that allows Natco Pharma to market a generic version of Revlimid in the U.S. at limited volumes beginning in March 2022, with no volume restrictions beginning in early 2026. Other generic-drug makers are also challenging Revlimid's patents. However, it would surprise me if Celgene doesn't reach agreements with other generic-drug companies that are similar to what it has in place with Natco.
Also, it seems likely that Humira and Revlimid will experience gradual sales declines when the day comes where they do face major competition. AbbVie and Celgene should both have plenty of time for other drugs to ramp up sales to offset those declines.
The risks aren't non-existent, though, which is why these two big biotech stocks have such low valuations. But I think AbbVie and Celgene are biotech bargains right now that will pay off for investors over the long run.
