Large Cap Biopharmaceutical Valuation Models
Can Biotech Growth Re-accelerate in Q4?
We reviewed large cap biotech stocks on July 3 just after the BREXIT bottom but prior to Q2 earnings and on May 8 after Q1 earnings. Here is data that offer comparisons of the core large cap holdings in the sector and their future growth potential. Keep in mind that the YoY stock performance includes the burst of the bio-bubble in the summer in 2015 so most stocks may still be down through Q3 on a YoY comparison.Drug pricing remains a political and re-imbursement issue for 2016 and beyond.
Most stocks have recovered during the recent rally since June 27 when the IBB rose 20% off the BREXIT V-shaped bottom.
Here is the stock performance of eight large cap biopharmaceutical companies after Q2 earnings:
- The winners YTD are: ABBV up 13%, AMGN up 6.22% and BIIB up 2.66%.
- The losers YTD are ALXN down 29.9%, REGN down 22.4% and GILD down 21.4%.
- The benchmark IBB was down 13.7% YTD about midway between losers and winners.
- Four biotech stocks now pay dividends: ABBV, AMGN, BMY and GILD.
- Celgene (CELG) remains a bellwether stock for sector momentum and upside potential despite its high valuation.
- BMY is a leader in “immuno-oncology” but recently had a clinical trial setback for Opdivo for lung cancer.
Assuming the market is reflecting all the known potential of the eight biotech stocks here are some comments on these metrics:
- QtoQ revenue growth is a reliable near term metric of stock performance if combined with QtoQ EPS growth: ABBV, AMGN, BIIB, CELG.
- High P/S ratios can no longer be supported in the current bear market. PEGs do not help the analysis except in the case of ABBV.
- IBB remains a good proxy for the sector and outperformed one of the top biotech mutual funds the Fidelity Select Biotechnology Fund (FBIOX).
The next step would be to look at product pipelines and 2017 revenue projections/upgrades to see which stocks can deliver growth. M&A is likely for these major players as they will need new products to complement pipelines.
In summary we are encouraged by the current rally and valuations are not excessive. We are staying with our current picks ABBV,BMY and GILD.We also recommended IBB and the Roche ADR (RHHBY) to balance out the portfolio. Unless a major correction ensues stocks should be higher in Q4.
| Ticker | Price | Market | 2016 | P/S | PEG | Q/Q | Q/Q | Perform | Price 1/18 | %Week | P 8/11 | %YTD | Div |
| 1/7/2016 | Cap $B | Rev$B | REV | EPS | %12 mos | 2016 | JPM’16 | 2016 | |||||
| 8/11/2016 | Gr% | Gr% | 8/11 | 8/11 | |||||||||
| ABBV | 57.21 | 108.5 | 24.75 | 4.39 | 1.17 | 17.8 | 17.9 | -2.44 | 57.32 | 0 | 66.9 | 13 | 3.43 |
| ALXN | 174.37 | 29.73 | 2.82 | 10.54 | 18.4 | 18.4 | -38.8 | -29.5 | 158.68 | -9 | 133.7 | -29.9 | |
| AMGN | 158 | 129.2 | 22.2 | 5.83 | 2.13 | 5.9 | 14.9 | 0 | 151.35 | -1 | 172.4 | 6.22 | 2.34 |
| BIIB | 284.01 | 71 | 11.24 | 6.32 | 1.91.9 | 11.7 | 21.6 | -1.78 | 273.33 | -3.76 | 314.8 | 2.66 | |
| BMY | 65.27 | 101.2 | 17.62 | 5.74 | 1.51 | 17 | 999 | -3.83 | 62.78 | -3.8 | 61 | -11.3 | 2.51 |
| CELG | 111.89 | 87.3 | 10.16 | 8.6 | 2.16 | 20.9 | 72.9 | -11.5 | 103.06 | -7.89 | 113.8 | -5 | |
| GILD | 96.25 | 104.8 | 32.4 | 3.24 | 86.9 | -5.7 | -11.5 | -30.5 | 91.84 | -4.58 | 79.6 | -21.4 | 2.38 |
| REGN | 501.96 | 43.8 | 4.44 | 9.88 | 3.46 | -31 | -9.3 | -27.2 | 462.95 | -7.76 | 421,5 | -22.4 | |
| IBB | 304 | 6.1 | -21.1 | 284.18 | -5.93 | 291.9 | -13.7 | ||||||
| XBI | 61.82 | 1.55 | -21.7 | 61.9 | -11.8 | ||||||||
| FBIOX | -33.2 | 188 | -21 | ||||||||||
| FBT | -18.3 | 98.4 | -12.9 | ||||||||||