That's the motivation of the U.S. Food and Drug Administration's (FDA) recently published "naughty list." The agency wants to publicly shame certain drugmakers for allegedly trying to prevent generic-drug makers from accessing samples of some of their brand-name drugs.
FDA commissioner Scott Gottlieb referred to efforts to keep samples out of the hands of generic-drug makers as "gaming tactics." Companies can often need several thousand doses of a brand drug to complete clinical studies for a potential generic version in order to win FDA approval. If they can't get those samples, they can't move forward.
But at least three of the biotechs singled out by the FDA deserve to be on another list -- investors' buy lists. Here's why Celgene (CELG), Gilead Sciences (GILD -1.09%), and Jazz Pharmaceuticals (JAZZ -2.02%) look like great stock picks right now.
The FDA has received multiple inquiries from generic-drug makers indicating that they couldn't get enough samples for three of Celgene's blood cancer drugs -- Revlimid, Pomalyst, and Thalomid. The first two of these drugs are very important to Celgene, with Revlimid generating $8.2 billion in revenue last year and Pomalyst contributing another $1.6 billion.
Inclusion on the FDA's list is among the least of Celgene's problems, though. The big biotech experienced a big pipeline setback in October with GED-0301 in treating Crohn's disease. Celgene also botched its regulatory filing for ozanimod in treating multiple sclerosis, a miscue that cost the company at least a year in potentially obtaining approval for the drug.
These issues have helped cause Celgene to lose nearly half of its market cap during the last eight months. But there are lots of reasons to like Celgene. Its current drugs, including Revlimid and Pomalyst, continue to enjoy great sales momentum. Celgene's pipeline still appears to be very strong. Ozanimod should still win approval. The company also has other promising candidates with blockbuster sales potential, including fedratinib and luspatercept.
Celgene stock currently trades at less than eight times expected earnings. The company's current product lineup and pipeline should enable the biotech to grow earnings by close to 20% annually over the next few years. That makes Celgene a great growth and value play, in my view.
2. Gilead Sciences
Gilead Sciences made the FDA's list due to inquiries from potential generic applicants for pulmonary arterial hypertension drug Letairis and HIV drug Truvada. Sales for Letairis totaled $887 million last year, while Truvada generated a cool $3.1 billion.
Gilead's bigger challenge by far, though, stems from its hepatitis C virus (HCV) drugs. Sales for these drugs have been plunging in large part due to fewer patients needing treatment. Gilead's drugs cure hepatitis C in most patients, so there aren't as many patients available as there once were. In addition, the company faces stiff competition from AbbVie's new HIV drug Mavyret.
Although Gilead doesn't have as low of a forward earnings multiple as Celgene, the stock still looks cheap with shares trading at 10.5 times expected earnings. Gilead could see better days in the near future. The company's management believes that HCV sales will stabilize for the most part later this year. Gilead's recently approved HIV drug Biktarvy is projected to be the biggest new drug launched in 2018.
The big biotech could be in even better shape over the long run. Gilead is a leader in the promising area of cancer treatment using CAR-T therapies, thanks to its acquisition last year of Kite Pharma. The company also claims one of the strongest pipelines targeting treatment of non-alcoholic steatohepatitis (NASH), an indication that could become the next big prize for the biopharmaceutical industry.
3. Jazz Pharmaceuticals
Jazz Pharmaceuticals made the FDA's list because of one inquiry from a generic-drug maker who couldn't get enough samples for antipsychotic drug FazaClo. Is FazaClo a big moneymaker for Jazz? Not at all. The company didn't even mention the drug in its latest SEC quarterly or annual filings.
Generic competition for FazaClo hasn't been a concern for Jazz. But it's a different story for narcolepsy drug Xyrem, which contributes more than 70% of the company's total revenue. However, Jazz managed to address the issue by striking a deal with Hikma Pharmaceuticals in 2016 that keeps a generic rival to Xyrem off the market until 2023.
With Xyrem now secure and rocking along with solid momentum, there are other positives to focus on with Jazz. The company launched leukemia drug Vyxeos in August 2017. Jazz hopes to win FDA approval for solriamfetol in treating excessive sleepiness in adult patients with narcolepsy or obstructive sleep apnea (OSA) by Dec. 20, 2018. The drug could significantly expand sales for Jazz in the sleep-disorder market.
Jazz Pharmaceuticals stock currently trades at 11 times expected earnings. Wall Street analysts project the biotech will grow earnings by an average of 16.5% annually over the next few years. I think that these solid growth prospects combined with an attractive valuation make Jazz one of the better biotech bargains on the market right now.
About that naughty list
In my opinion, the FDA's list isn't that big of a deal. The biggest seller of the drugs mentioned above, Celgene's Revlimid, already has a generic version scheduled to hit the U.S. market in 2022 -- several years before it loses U.S. patent exclusivity. Gilead's Biktarvy will likely do nearly as much damage to sales of Truvada as any generic competitor would.
However, I have no problem with the FDA using the bully pulpit in an attempt to influence drugmakers. It will probably work to some degree. I won't be surprised if more biopharmaceutical companies make it at least a little easier for generic-drug makers to access samples of brand drugs.
Celgene, Gilead Sciences, and Jazz Pharmaceuticals might even fall off the FDA's next list. But for investors, these naughty biotechs look like nice bargains.