Large Cap Biopharmaceuticals Winners and Losers 2015-16: Which Stocks Can Outperform the ETFs in 2016?… Part 1

Where is the Growth Potential in Large Cap Biopharmaceutical Companies?

Caution: Risk Aversion Remains High

Investing in biotech stocks ain’t getting easier. The sector is underperforming the market by 16% YTD, sentiment has been burned by concerns about drug pricing and even the spectre of a FED rate rise, with potentially less available equity funding, has hit all stocks. To beat the market in 2016 you need to select specific stocks that have value, dividends and a near term pipeline. The objective here is to select 3-4 large cap biopharmaceutical stocks that can beat the IBB. Now that the speculative fever has subsided large caps can provide growth and safety.

We are reviewing financial metrics and valuations of large cap biopharmaceuticals to develop a portfolio that could supplement the IBB. The IBB is down 22% YTD compared to 9% for the broader based XLV healthcare ETF. When all reporting is complete this week we will compare valuations and growth prospects balanced by technicals which are very important in a bear market.

  • Although there was a Q4 2015 rally as expected, January had no follow through, instead massive selling.
  • The well attended J.P.Morgan Healthcare Conference offered little encouragement for buyers despite technology and pipeline updates.
  • The sector reached an extreme of bubble behavior in 2015 culminating in a July 2015 top. We are paying for that now.
  • Some of the most “overvalued” large caps have had the biggest declines over the past six months reflecting a more cautious approach to investing. Valuation matters.
  • Small and Mid Cap stocks have been crushed since mid-summer reflected in the XBI down 42% since early August.

As of 1/31/16 YTD here is the 2016 stock performance, and followed by 12 month performance:

Amgen (AMGN) down 5.91%, up 0.31%

Abbvie (ABBV) down 7.33%, down 9%

Bristol-MyersSquibb (BMY) down 9.64%, up 3.14%

Biogen (BIIB) down 10.9%, down 29.8%

Celgene (CELG) down 16.2%, down 15.8%

Gilead Sciences (GILD) down 18%, down 20.8% (up after hours today to $83.80)

Regeneron (REGN) down 22.6%, up 0.82%

Alexion (ALXN) down 23.5%, down 20.36%

Until the selling abates it will be difficult to pick winners. If you assume the market reflects all the news and earnings reports as of today we still cannot call a technical bottom (need to hold $260 on IBB). The three most attractive stocks on a value reading are: Abbvie (ABBV), Amgen (AMGN) and Gilead Sciences (GILD) but that does not mean they have better growth potential. Gilead Sciences reported earnings today and beat but investors are cautious on a declining sales trend of Sovaldi and Harvoni HCV drugs going forward due to competition from Merck’s (MRK) recently approved Zapatier. Maybe we have reached the point of lower growth prospects and this is being reflected in valuations. So we are at the cusp of growth and value but in Part 2 of this article hope to find 3 stocks to build a long-term portfolio.

Disclosure long ABBV, GILD.

 

Company Ticker Price Market 2015 P/S PEG Q/Q Rev EPS Q/Q Stock Perf Price 1/18 % Week Price 1/31 %YTD
1/7/2016 Cap Rev$B Gr% Gr% %12 mos 2016 JPM 2016
1/31/2016
Abbvie ABBV 57.21 89.75 22.86 3.93 0.86 17.4 282.4 -9.03 57.32 0 54.58 -7.33
Alexion ALXN 174.37 32.88 2.5 13.14 6.75 20.1 -192 -20.36 158.68 -9 145.93 -23.5
Amgen AMGN 152.98 114.13 21.46 5.37 1.91 13.8 51.6 0.31 151.35 -1 152.73 -5.91
Biogen BIIB 284.01 60.87 10.67 5.65 1.83 7.5 14.6 -29.8 273.33 -3.76 273.06 -10.9
Bristol Myers BMY 65.27 103.7 16.53 6.27 2.87 3.8 -2.3 3.14 62.78 -3.8 62.08 -9.64
Celgene CELG 111.89 78.82 9.26 8.52 2.19 7.5 -0.8 -15.8 103.06 -7.89 100.32 -16.2
Gilead Sci GILD* 96.25 119.62 31.45 3.8 -0.52 37.3 83.2 -20.8 91.84 -4.58 83 -18
Regeneron REGN 501.96 43.72 3.81 11.48 3.91 56.7 154.9 0.82 462.95 -7.76 420.09 -22.6
IBB 304  (19) 284.18 -5.93 267.05 -17

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