Biogen – Brystol Meyers – Allergan – Celegene – Gilhead
These biotech shares have been trading at a significant discount to the market and now we rate them a STRONG BUY as the industry strengthens and plays catch up
The year 2019 has been good for the biotechnology sector , with the NASDAQ Biotechnology Index returning 13.3%.
Increasing M&A deals, growing AI dominance and favorable regulatory tidings continue to work in favor of the biotech market. The sector has been benefitting from a flurry of positive news, including trial results and deal activities.
The biotechnology universe is divided into two groups: The majority are companies without profits, or even sales, chasing a scientific breakthrough and the resulting massive payoff for investors.
A much smaller group of companies have graduated to megacap status. Like most companies of their size, these sport massive profits and cash flows, with much less growth potential.
It has been a long time since betting on value has been a winning strategy. The Nasdaq Biotechnology Index, which is weighted by market value, is down nearly 20% from the record high set in 2015. During this period, cheap stocks have generally become cheaper. This trend has been particularly true for mature companies that generate a large share of revenue from single blockbuster products because the risk of patent expirations or innovation from a rival is elevated.
Biogen – BIIB NASDAQ
Lately, however, there have been some big payoffs for patient investors. Biogen stunned investors in October by announcing that it plans to seek regulatory approval for its experimental Alzheimer’s drug, aducanumab. While the drug’s efficacy remains controversial, a potential multibillion-dollar opportunity is back on the table for shareholders. Biogen shares traded at less than 7 times forward earnings before the announcement.
Brystol Meyers Squibb – BMY NYSE
In another piece of good news for a beaten-down stock, Bristol-Myers Squibb recently announced that its immunotherapy combination of drugsshowed strong results in a lung-cancer trial. The drugs had slipped behind competitors after being on the market and generating blockbuster sales for years. The new data could eventually lead to a sales boost.
Allergan – AGN NYSE / ABBVI – ABBV NYSE – Celegene – CELG NASDAQ
Investors also have become more comfortable with a wave of megadeals that were at first poorly received. Shares of AbbVie plunged in June after the company announced a buyout of Allergan for $63 billion in cash and stock but have since recovered. Bristol-Myers fell sharply in January after announcing a $74 billion takeover of Celgene, but the stock is higher than before the announcement.
Helping matters, the sector’s earnings have been solid, though unspectacular.
Biotech investors know better than most that a low earnings multiple hardly guarantees strong future stock performance.
Despite the recent spate of good news, the group mostly trades at a significant discount to the market. Many companies’ shares in the sector can be had for 12 times forward earnings or less while the broader S&P 500 goes for more than 17 times. That markdown looks more attractive when news is positive.
Gilhead Sciences – GILD NASDAQ
High dividend yields, meanwhile, make the waiting game more attractive. AbbVie shares yield 5% even after the recent rally. Gilead Sciences yields nearly 4% and trades at just 9 times earnings. Gilead also has $25 billion in cash and can comfortably make a splashy deal if it chooses.
As the stock market charges back to all time records, biotech value is starting to give off a healthy glow of its own. From Wall St Journal –
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