Health and Healthcare

Why Value Investors May Flock to Top Biotechs in 2019

Jon C. Ogg

Published: January 2, 2019 2:00 pm

Last Updated: January 11, 2020 1:05 pm

With 2018 having finally turned into 2019, many investors are finalizing how they want their assets and portfolios positioned for the next year or two. The stock market volatility of late 2018 spooked many investors into being more defensively positioned. If not, perhaps it should have. But what about the world of established biotechnology and emerging pharmaceutical giants?

24/7 Wall St. conducts annual forecasts and reviews of the market as a whole, as well for certain sectors, at the start of each year. It seems crazy to think that the model of the past years would point toward the Dow reaching 28,000 in 2019. That would be a gain of about 20%, and it’s on the heels of major headwinds for the global economy ahead. More likely than not, analysts on Wall Street are going to have to temper some of their broader expectations for the market’s top stocks.

Biotechnology is far from a defensive stock sector. In fact, biotech can be punished during certain times in the bull-bear cycles. On the other hand, biotech stocks have historically offered extraordinary upside potential for investors, based on the success of future blockbuster drugs.

The 24/7 Wall St. review for 2019 has looked at the consensus data on the top biotech and emerging pharma players with a market cap of more than $20 billion. This came to seven names in our research database that are tracked each week. We have included consensus data from Thomson Reuters, offered trading history, and added in color where appropriate.

One issue that will stand out for investors who have evaluated biotech stocks for more than a decade is just how low some of the valuations are in the industry’s leading stocks. In fact, this is where value investors may like the sector much more than growth investors viewing the established biotech names today.

One ongoing concern is virtually the same as the Big Pharma industry faced in the recent past: the dreaded “patent cliff” wherein key drugs can no longer be expected to generate endless sales growth. Pharma stocks have to ultimately worry about generic drug competition, and big biotechs already have been dealing with biosimilars and new competition in recent years. It has led to a serious maturing of the industry. And this sector has proven that it can be painful switching from a major growth sector to one targeting value investors.

Here is a review of the outlook and expectations for 2019 in the biotech sector in seven top biotechs valued at $20 billion or more.

Alexion Pharmaceuticals

Alexion Pharmaceuticals Inc. (NASDAQ: ALXN) closed 2018 at $97.36, for a loss of more than 18% for the year. This has been a volatile stock, which can be seen in its 52-week trading range of $92.56 to $140.77. What is amazing here is that the consensus analyst price target for 2019 is all the way up at $164.35. That would represent about 68% in implied upside, if the analyst community’s bullishness proves to be more accurate than its more recent trading. During the worst December the market has seen since the Great Depression of the 1930s, this was almost a $130 stock in early in the month. Its shares are still barely in the $20 billion market cap club.

The continued optimism looks to be around Alexion’s Soliris driving growth at a time of drug price pressure. This is the company’s top growth driver today, with approval for the treatment of two severe and ultra-rare disorders called paroxysmal nocturnal hemoglobinuria and atypical hemolytic uremic syndrome. Alexion is seeking to expand that label so that Soliris can cover additional indications.

Despite the drop in the shares, analysts see growth continuing in earnings per share and revenues for 2018 and 2019. Alexion is also valued at just under 13 times earnings, and even lower looking ahead.

Amgen

Amgen Inc. (NASDAQ: AMGN) closed 2018 at $194.67, for a gain of 11.9%. That’s even before considering its 3% dividend yield. The first day of trading started out with a loss of more than 1%, but Amgen is a top player in biotech, with a $122 billion market value.

Amgen is a name that has come up in numerous discussions over drug prices over the years. In fact, some price discussions were seen from politicians over its drugs more than a decade ago. Amgen’s 52-week trading range is $163.31 to $210.19, and the company ended 2018 with a consensus target price of $204.52. That implied only a 5% gain for 2019, if analysts are correct, but that is before considering its 3% dividend yield.

The big question for Amgen is from where its growth will come. After sales of $22.8 billion in 2017, the consensus analyst estimates were last seen at almost $23.4 billion for 2018 but ticking down to almost $22.9 billion in 2019. Biotech investors prefer to speak about growth over value, but the value-conscious investor would point out that Amgen is valued at a mere 13.5 times expected earnings.

Biogen

Biogen Inc. (NASDAQ: BIIB) closed at $300.92 in 2018, for a loss of 5.5%. Still, its 52-week range was wide at $249.17 to $388.67. What’s interesting here is that analysts have a consensus price target of $385.37, which would imply upside of 28% for 2019.

Biogen has dropped the Idec name from its moniker, and its earnings growth of $21.81 per share in 2017 is expected to reach $25.85 in 2018 and then to grow to $28.00 in 2019. The problem here is that revenue growth of over 8% is expected to slow to 3% growth in 2019. Still, that’s a valuation of only 11 times this next year’s earnings, for a company valued at $61 billion.

Biogen is among drug companies that have been reported to raise their drug prices in 2019. That may create some political sensitivities in the coming year, at least that is one reason why its shares may have seen no gains in 2018. Biogen has been a range-bound stock between $250 and $350 for most of the past three years, but this had been a $400 stock prior to that.

Celgene

Celgene Corp. (NASDAQ: CELG) had a rough 2018, with its $64.09 end-of-year price representing a drop of almost 40%. Its market cap is still $46 billion or so, but the 52-week trading range of $58.59 to $109.98 should show how volatile 2018 was. In December alone, Celgene shares slid from $75 to just under $60, before a recovery right around Christmas.

What stands out here is that analysts on Wall Street still have a consensus price target of $104.66. After losing almost 40% in 2018, does it seem logical to expect gains of 63% in 2019?

Celgene’s earnings per share of $7.44 in 2017 were expected to rise to $8.79 for 2018 and then to head north of $10 or so per share in 2019. Meanwhile, revenue growth projected at 17% for 2018 was most recently expected to slow to 11% in 2019. Still, Celgene is valued at a mere eight times the 2018 earnings estimate and less than seven times 2019 earnings. This should keep investors focused on growth and other developments at a JPMorgan health care conference in January.

Gilead Sciences

Gilead Sciences Inc. (NASDAQ: GILD) may still be worth $82 billion, and it has been dead money now for longer than most investors would like to be reminded about. Despite paying up handily to acquire Kite Pharma for its cancer franchise, Wall Street was not impressed about how long it would take for the deal to be accretive to earnings. After closing 2018 at $62.55, Gilead had a loss of 12.7% in 2018, and its 52-week range of $60.32 to $89.54 might tell you how the year turned out.

After having been a $70 stock at the start of December, the consensus target price was still up at $87.06 at the start of 2019. That would represent upside of 39%, before taking its 3.6% dividend yield into consideration.

After Gilead took a huge bite out of the hep-C market, Wall Street just doesn’t seem to expect any major growth opportunities coming short term. After earnings of $8.84 per share in 2017, the consensus estimates were last seen at $6.92 per share for 2018 and $6.75 per share in 2019. And sales dropped off after 2017, but they are expected to stabilize between $21 billion and $22 billion for 2018 and 2019. That is part of why Gilead is valued at less than 10 times expected earnings.

Regeneron Pharmaceuticals

Regeneron Pharmaceuticals Inc. (NASDAQ: REGN) was one of the biotechs with the greatest growth stories of the past decade. After closing 2018 at $373.50 a share, this was almost considered a flat year. Still, its market cap is $40 billion, and its 52-week range of $281.89 to $416.49 should show volatile it was. It seems hard to fathom that this was a $20 stock prior to 2010.

Analysts still see more upside to more highs, with a $428.33 consensus price target, an implied gain of better than 14%. Regeneron is investing hundreds of millions of dollars to expand a facility in the New York region for office and lab testing space.

With drugs like Eylea, Dupixent, Praluent, Kevzara and more, Regeneron is expected to grow earnings per share from $16.32 in 2017 to $21.59 in 2018. That forecast is for $22.60 per share in 2019, with sales growth remaining at about 10% and reaching above $7 billion. That values Regeneron at about 17 times expected earnings and about six times expected revenues.

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Vertex Pharmaceuticals

Vertex Pharmaceuticals Inc. (NASDAQ: VRTX) managed to gain about 10% to $165.71 in 2018. Its 52-week range of $144.07 to $194.92 is followed by a consensus analyst target of $198.64, or an implied upside of nearly 20%.

Despite a valuation of $42 billion, Vertex has a valuation of close to 40 times expected earnings for 2019. That might not stand out as too high in biotech frenzies of the past, but the current biotech universe for the large companies now values them the same or even less than some of the established pharmaceutical giants of today. That’s also valued at about 12 times forward revenues, with the expected sales growth of more than 30% expected to slow to 18% growth in 2019.

Analysts have been mixed on the expectations here, with some firms raising targets and others lowering them in recent months. Unfortunately, there is very little added insight here on its expectations for the time being.