Biotechnology appears have shaken off the decelerating impact of political and policy uncertainty that had created a drag on the industry over the last couple of years. This year, though, biotech has hit its stride to become one of the best-performing sectors of the stock market.
The S&P Biotechnology Select Industry Index is up 14.5% for the year to date, clocking far better returns than the relatively modest 1.5% gains for the S&P 500 Index and 1.6% for the S&P Healthcare for the same period, as of July 3, 2018. The rebound in biotech stocks indicates that fears over U.S. President Donald Trump's proposal for capping drug prices and the inevitability of patent maturity have subsided, while fundamental factors such as demographics, demand and drug innovation have once again become the primary focus and growth drivers.
Larger biotech companies are well positioned for revenue growth underpinned by aging boomer population, new drug discoveries and pipelines, and rapid advances in treating critical illnesses.
The following biotech giants -- known for strong drug innovation, differentiated product portfolios and competitive strength -- are trading at an attractive discount to their fair value, which makes them compelling investment options for investors looking for value opportunities in stretched markets.
| Gilead Sciences Inc. | ||
| Ticker: | GILD | |
| Current yield: | 2.90% | |
| Forward P/E: | 12.1 | |
| Price: | US$76.76 | |
| Fair value: | US$82 | |
| Value: | 6.4% discount | |
| Data as of July 9, 2018 | ||
Gilead Sciences (GILD) develops treatments for life-threatening infectious diseases including HIV, hepatitis B and C, pulmonary and cardiovascular diseases and cancer. The firm's recent acquisitions of Pharmasset and Kite have boosted its presence in the hepatitis C and faster-growing gene-therapy markets.
Gilead derives its sustainable competitive advantage from its expertise in infectious diseases and its research and development strategy. "The firm has shown that it can translate its extensive understanding of the drug discovery and development process in HIV into new therapeutic areas, allowing it to achieve wide-moat status," says a Morningstar report. "Patent protection on newer HIV regimens and Gilead's continued dominance in the hepatitis C market will be enough to ensure strong returns for the next couple of decades."
The company generates strong profit margins with its HIV and HCV portfolio, which requires only a small salesforce and low-cost manufacturing. The biotech behemoth enjoys a "leadership position in the treatment of HIV, with three patented products that form the backbone of today's treatment regimens," says Morningstar sector strategist Karen Andersen, who puts the stock's fair value at US$82.
Owing to its convenient, effective and safe treatments, the company serves 80% of treated HIV patients in the United States, enjoying "spectacular profitability," she adds.
More recently, the company has been expanding its portfolio to the hepatitis C and oncology markets. "The molecule in [hepatitis C drugs] Sovaldi and Harvoni has redefined Gilead as a powerhouse in the broader infectious disease market," says Andersen, noting that the company is "leading the way for all-oral treatments in the hepatitis C market."
Anderson rates its management as exemplary for astute investment strategies and good allocation of capital, pointing particularly to acquisitions and collaborative deals made over the years.
| Biogen Inc. | ||
| Ticker: | BIIB | |
| Current yield: | - | |
| Forward P/E: | 15.0 | |
| Price: | US$351.21 | |
| Fair value: | US$404 | |
| Value: | 13.1% discount | |
| Data as of July 9, 2018 | ||
A leader in the multiple sclerosis (MS) and cancer drugs market, Biogen (BIIB) also has several potential drugs currently in phase 3 trials in immunology and neurology diseases.
"Biogen has a strong R&D strategy for maintaining its leadership in MS, where pricing power is strong, patient need for novel therapies is high, and the pipeline has been particularly productive," says a Morningstar equity report.
In addition to a dominant share of the MS market, Biogen has achieved strong profitability driven by the success of oncology and neuro-immunology products. These factors combine to create the firm's sustainable competitive advantage.
The drugmaker has strong human genetic validation for its neurology pipeline, which should help diversify revenue and boost sales. "Spinal muscular atrophy drug Spinraza is launching and could reach US$2 billion in peak sales," says Andersen, who recently raised her estimate for the stock's value from US$372 to US$404.
Additionally, late-stage Alzheimer's drug aducanumab, if approved, could become a multibillion-dollar blockbuster, Andersen projects. The drug had strong phase 1 data and is due for approval in 2020.
High barriers to entry for potential biosimilars, a solid R&D strategy, durable pricing power, demand for novel therapies and a productive pipeline create a tailwind of growth that will keep the company profitable.
Morningstar forecasts GAAP operating margins to be in mid-40s for 2018 and returns on invested capital to average above 20% during the 10-year forecast period. "Biogen's top-line growth will average 5% through 2022, and share-repurchase activity should enable the firm to achieve average earnings per share growth of 6% during this same period," says Anderson.
| Celgene Corp. | ||
| Ticker: | CELG | |
| Current yield: | - | |
| Forward P/E: | 9.7 | |
| Price: | US$84.07 | |
| Fair value: | US$104 | |
| Value: | 19.2% discount | |
| Data as of July 9, 2018 | ||
Biopharmaceutical giant Celgene (CELG) discovers, develops and markets products to treat cancer and immunological diseases.
Celgene's best-seller multiple myeloma therapy, Revlimid, forms the core of the firm's competitive edge and is key to its future growth potential. "Revlimid in first-line multiple myeloma and post-transplant maintenance should drive expanded share in the U.S. but particularly in international markets," says a Morningstar report, noting that the global multiple myeloma market could grow from US$11 billion in 2016 to US$22 billion by 2021.
The drugmaker's remaining portfolio diversifies its revenue base and reduces reliance on Revlimid as a growth driver. In oncology, chemotherapy treatment Abraxane is strong in pancreatic cancer and could see increased uptake through use with immuno-oncology therapies.
In its immunology division, psoriasis/psoriatic arthritis drug Otezla is garnering significant demand among new patients, and is projected by Morningstar to rack up more than US$4 billion in sales. The firm's first immunology drug, Otezla could reach US$2.5 billion in sales by 2021 and is expected to continue to grow and maintain a strong position in moderate psoriasis market, says Anderson, who puts the stock's fair value at US$104, nearly 20% above its current market price.
Earlier this year, Celgene scooped up the remainder of Juno Therapeutics it didn't already own for US$9 billion, intensifying its push into the lucrative oncology market. The acquisition allows Celgene ownership of Juno's rich pipeline of CAR-T cancer drugs, cutting-edge therapies that use the body's own immune system cells and manipulate them to fight cancer.
Morningstar projects Celgene's top-line to grow at 12% and bottom-line at 15% during the five years ending in 2022, with operating margins reaching 58% in 2021.
Editor's note: The author owns a small position in shares of Gilead Sciences Inc.
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