Large Cap Biopharmaceuticals-Valuation Models 2016

Biopharmaceutical Valuations Look Attractive

Sector Poised for Rebound by Year End

This is a continuing review of large cap biopharmaceutical valuation metrics to determine which companies can deliver growth from their broad pipelines. The biotech sector has underperformed the market because of the severe correction in August/September of 2015 followed by another downdraft in January 2016 all the result of “bubble” valuations. Although the following metrics show that most of these companies could not be considered value stocks their stock prices have stabilized so that we can anticipate new winners by the end of Q4 2016. For this to happen we need top line growth from new and existing products. The main issue is whether pricing will weaken as was the case with Gilead Sciences (GILD) and their HCV portfolio of products.

Stock Performance YTD:

  • Our core portfolio picks have outperformed the leading ETF the IBB (down 22.5%) on a YTD basis. BMY up 7.1%, ABBV up 5.8%, GILD down 16.2%.
  • The “hypergrowth” momentum plays are the worst performers YTD due to excessive valuations in August 2015. ALXN down 38.1%, REGN down 33.9%.
  • Amgen (AMGN) , Celgene (CELG) have relatively flat stock performance YoY.
  • The worse performers YoY are BIIB down 39.6%, REGN down 29%, ALXN down 27.8% and GILD down 26.8%. The IBB was down 29% YoY..
  • Celgene (CELG) is a bellwether stock for an upside surprise in Q4 because of its pipeline and relative stability.
  • Roche ADR (RHHBY) is down 4.67% YTD. Roche is not included in the analysis because it is a foreign stock with limited financial reporting including current impacts.

The biotech sector is currently in a rally mode off the BRexit bottom so we expect the IBB to reach an intermediate target of $270. Although the sector is still in a bear market there will be strong rallies and our forecast is for higher prices for these stocks by year-end.

Assuming that the market has priced in all the expectations for these stocks in the near term we should look at the impact of Q2 earnings by the end of July. Our last review after Q1 earnings showed limited growth prospects but there is less  downside for these stocks.

We are sticking with our core large cap portfolio and using ETFs to overweight or hedge with shorts: ABBV, BMY, GILD, RHHBY*. We will add stock picks after Q2 earnings.

Roche not included in above metrics.

Company Ticker Price Market 2016 P/S PEG Q/Q Q/Q Perform Price 1/18 %Week P 7/1 %YTD
1/7/2016 Cap $B Rev$B REV EPS %12 mos 2016 JPM’16 2016
7/1/2016 Gr% Gr% 7/1 7/1
Abbvie ABBV 57.21 101.4 23.78 4.26 1.15 18.2 31.1 -8.4 57.32 0 62.7 5.8
Alexion ALXN 174.37 26.6 2.7 9.8 8.1 16.8 -10.1 -27.8 158.68 -9 118 -38.1
Amgen AMGN 158 115.9 22.6 5.23 1.95 9.8 18.5 0 151.35 -1 154 -5
Biogen BIIB 284.01 53.7 10.94 4.91 1.93 6.7 26.8 -39.6 273.33 -3.76 244.6 -20
Bristol Myers BMY 65.27 123.2 16.91 7.28 3.45 8.7 0.5 9 62.78 -3.8 73.6 7.1
Celgene CELG 111.89 78 9.7 8.05 2.21 20.7 15 -14.8 103.06 -7.89 100.4 -16
Gilead Sci GILD 96.25 113 32.8 3.44 11.26 2.6 -8.6 -26.8 91.84 -4.58 84.6 -16.2
Regeneron REGN 501.96 37.7 4.44 8.49 3 38 118.6 -29 462.95 -7.76 358 -33.9
IBB 304 6.1 -29 284.18 -5.93 262 -22.5
XBI 61.82 1.55 -33 55.6 -20.9
FBIOX -33.2 169 -26
FBT -26 91.4 -19.4

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