2018 Outlook: Biotech Stocks Looking Strong for Value and Growth Investors

December 6, 2017 by Jon C. Ogg

Source: Thinkstock
With 2017 coming to an end, investors are wondering how they should be investing for 2018 and beyond. At the start of December, the Dow was up just over 20% and the S&P 500 was up almost as much. The S&P Biotechnology Select Industry Index was last seen up about 30% so far in 2017, but the problems in the biotech segment have been numerous.

When 24/7 Wall St. reviews its waves of outside research notes each morning, a growing trend is becoming impossible to ignore: analysts keep raising price targets while the amount of anticipated upside keeps shrinking. This matters in all sectors, but it is very important for investors to understand the risk versus upside when it comes to emerging pharma and biotech stocks. Fortunately, analysts in general are more positive than cautious about biotech in 2018.

At the start of 2017, most Dow and S&P stocks with new Buy and Outperform analyst ratings seemed to come with average targets of 10% or 15% for most sectors. At the end of 2017, that implied upside is usually less than 10% projected total returns, after factoring in gains and dividends. Most of the larger biotechs have upside projections of more than 10% for the coming 12 months, and some of the recent biotech sell-offs may bring far more upside if the pool of analysts is correct.

The bull market is now nearing nine years old. After the gains in the broad market, and the late-2016 gains after the election, it is now frequently the case that investors are seeing reiterated ratings come with even just 5% or 6% upside. That can be far higher in the emerging biotech companies with no long history of drug sales, but investors in biotech need to consider whether there is enough projected reward that comes with Buy and Outperform ratings in the well-heeled and established large cap biotechs.

24/7 Wall St. has focused on the outlook for biotech valuations and implied upside in 2018. The overall stock market valuations are high, but not at nosebleed levels of past bubbles. Biotech valuations are in many cases looking quite cheap, and even many of the established names would show up in most value investor screens. Then again, when biotech investors are looking at “value” they sometimes find that they are in a value trap.

Biotech investors have many risks. There is a current pledge to get drug prices lower, but that has often been ignored in biotech of late. The larger biotech companies are also expected to crank up their view on mergers ahead, adding to future drug pipelines. That could put a slew of $500 million to $5 billion values up for grabs, though these companies mentioned here would be the most likely acquirers rather than the acquisition targets.

Investors often use the Thomson Reuters consensus analyst target price as a gauge of whether there is implied upside in a stock. This takes out the bias and noise from one very positive analyst or from one very cautious one. This has been used for implied upside and for forward valuation metrics.

It is no secret that biotech stocks can bring great rewards for investors. They can also deliver serious pain. It is for this reason that most investors should simply demand more upside from biotechs than should from utilities, 50-year-old drug companies, technology giants, banks and financials, and broader industrials. Fortunately, most of the big biotech and biotech-related stocks valued at about $20 billion on up are currently projected to deliver a solid 2018.

Amgen: A strong 2017 may look more muted in 2018.

Amgen Inc. (NASDAQ: AMGN) was last seen up 22.2% so far in 2017, and it is valued at 14 times forward earnings. Its dividend yield is also better than 2.5%. If analysts are correct, the expected total return for the coming 12 months would be about 9%.

Shares of Amgen closed most recently at $178.67, compared with a consensus analyst target price of $190.55. The 52-week trading range is $138.83 to $191.10, and the market cap is $129.7 billion.

Gilead Sciences: Is it value or a value trap?

Gilead Sciences Inc. (NASDAQ: GILD) has given shareholders a total return of about 2% so far in 2017, but that has been only because of its 2.8% dividend yield. Gilead shares are currently well under former highs and the stock is valued at only 8.5 times forward earnings. The stock almost always comes up on every value screen imaginable, but that is because sales have flattened. The recent acquisition of Kite Pharma is still being integrated into analyst models. If those analysts are correct, the implied total return would be about 20% for the coming year.

Shares of Gilead closed at $73.29, with a consensus target price of $85.70. The 52-week range is $63.76 to $86.27, and the market cap is $95.7 billion.

Celgene: Disappointing 2017 may bring value for 2018.

Celgene Corp. (NASDAQ: CELG) has disappointed with a drop of about 11% so far in 2017. That drop is due to a 26% decline over the past quarter, and Celgene is valued at about 14 times forward earnings. Analysts have expected upside of about 21% for the coming 12 months.

Celgene shares closed at $102.56, and the consensus target price is $123.97. The 52-week range is $94.55 to $147.17. The market cap is $80.7 billion.

Biogen: Strong gain in 2017 looks more muted ahead.

Biogen Inc. (NASDAQ: BIIB) shares have risen about 22% so far in 2017, and analysts are calling for upside of about 12% for the coming 12 months. Biogen shares have been recently range bound and looking for direction. The stock is valued at about 14.5 times forward earnings.

Biogen shares closed at $319.87, in a 52-week range of $244.28 to $348.84. The consensus target price is $358.15. Biogen has a market cap of $67.6 billion.

Regeneron: Late 2017 pullback may offer value for 2018.

Regeneron Pharmaceuticals Inc. (NASDAQ: REGN) has been a laggard in 2017, with a gain of only about 3%. Its stock has also been rather volatile this year after losing about one-fourth of its value in the past quarter. If analysts were not blindsided by the pullback and are proven correct, Regeneron shares have about 23% in expected upside in the year ahead.

Shares of Regeneron closed at $372.34. The consensus analyst target of $458.78 compares with a 52-week range of $340.09 to $543.55. The market cap is $39.8 billion.

Vertex: Great gains in 2017 could still bring rewards in 2018.

Vertex Pharmaceuticals Inc. (NASDAQ: VRTX) may not have been a great performer in the past quarter after a recent pullback from its highs, but this stock is up almost 88% so far in 2017. Vertex is now valued at about 70 times expected earnings. Even after such big gains earlier this year, analysts are calling for upside of roughly 33% in the year ahead.

Vertex closed at $138.36 a share, which compares with the consensus target price of $183.21. The 52-week trading range is $71.46 to $167.86, and the market cap is $34.5 billion.

Illumina: Did 2017 gains eat in to 2018’s gains?

Illumina Inc. (NASDAQ: ILMN) has generated gains of 65% so far in 2017, but shares have been flat over the past quarter. It is valued at more than 55 times expected earnings, and analysts now are forecasting only 4% upside in the year ahead due to its high valuations against sales.

Illumina closed at $211.06 a share. The consensus target price is $220.40, and the 52-week range is $119.37 to $230.72. The market cap is $30.8 billion.

Alexion: Disappointment today may bring rewards tomorrow.

Alexion Pharmaceuticals Inc. (NASDAQ: ALXN) has lost about 11% for its shareholders so far in 2017, mostly due to a 25% drop over the past 90 days. It is valued at about 19 times expected earnings, but analysts are calling for nearly 50% upside in the coming year.

Shares of Alexion closed at $108.90. The consensus target price of $163.43 compares with the 52-week range of $96.18 to $149.34. Alexion has a market cap of $24.3 billion.

Incyte: Disappointing 2017 expected to see big recovery in 2018.

Incyte Corp. (NASDAQ: INCY) has been a disappointment in 2017, with a 6% drop, but its shares were down over 30% in the past quarter. That sell-off may have left some analyst targets seemingly high, but all in all the pool of analysts have an average upside projection of about 57% for the coming 12 months. 2018 is expected to be a marginal return to profitability, but the estimates range from a loss of more than $1 per share to a gain of more than $1 per share. Either way, it is valued at about 12 times next year’s expected sales.

Incyte closed at $93.71, versus a consensus target price of $148.63. Its 52-week range is $93.49 to $153.15, and its market cap is $19.8 billion.

*******

Biotech as a sector was recently featured by State Street Global Advisors as a sector of secular growth at a reasonable price. The firm’s 2018 outlook noted that biotech valuations are below their long-term average and may offer strong secular growth prospects as the aging population continues to need more medical treatment and innovation.

And Big Pharma

In addition, 24/7 Wall St. wanted to see how the pool of big cap biotechs compares to some of the top Big Pharma stocks that have been around for many years and that have relatively stable drug sales.

Pfizer Inc. (NYSE: PFE) is valued at less than 14 times expected earnings and its dividend yield is about 3.6%. Its shares were up 11% so far in 2017, but analysts are calling for a total return of about 10.5% in the next 12 months. Pfizer closed at $35.61, with a consensus target price of $38.14. Its 52-week range is $30.51 to $36.78 and its market cap is $212.3 billion.

Merck & Co. (NYSE: MRK) shares were down 4.5% so far in 2017, partly offset by its 3.4% dividend yield. Its forward P/E ratio is 14, and if analysts are correct there is more than 17% upside and more than 20% in expected total return with the dividend. Merck closed at $55.74. The consensus target price is $65.36, and the 52-week range is $53.63 to $66.80. The market cap is $151.9 billion.

AbbVie Inc. (NYSE: ABBV) shares were up about 52% so far in 2017, and its forward P/E ratio is over 17. It also has a 3% dividend yield. Because AbbVie has performed so well in 2017, the pool of analysts currently has just an 8% implied total return for the coming 12 months. The shares closed at $95.34, with a consensus target price of $99.85. The 52-week range is $58.80 to $98.52. The market cap is $152.2 billion.

Bristol-Myers Squibb Co. (NYSE: BMY) was last seen up about 7% so far in 2017, and it is valued at just over 20 times expected earnings. With a yield of 2.5%, analysts see a total return ahead of only about 5.5%. Shares of Bristol-Myers closed at $61.97, in a 52-week range of $46.01 to $66.10 and with a consensus target price of $63.82. The market cap is $101.4 billion.