(This story was originally published Nov. 8.)
You don’t usually get the chance to pick up the entire research-and-development arm of a major company for free.
But given the sharp declines in biotechnology stocks, with the iShares Nasdaq Biotechnology exchange traded fund (ETF) IBB, -1.08% and SPDR S&P Biotech ETF XBI, -1.76% recently down as much as 20%, these kinds of deals are popping up now.
You should take advantage of them.
Consider Gilead Sciences GILD, +0.41% and Celgene CELG, -0.18% for example. At recent prices of $70 and $75, they traded at market values that aren’t too far above the value of their operating businesses, according to discounted cash flow analysis by Jefferies biotech analyst Michael Yee and his team.
That means if you buy these stocks now, you get their pipelines just about for “free.” Using Yee’s math, these two would have to fall to $65 and $70 a share, respectively, for you to get their pipelines straight up gratis. But they are pretty close. So, like Yee, I’d suggest buying now. Then add if they fall back to their “free pipeline” stock prices.
Yee rolls out his “free pipeline” valuation analysis whenever biotech gets hit particularly hard. It’s worth watching, because these levels can serve as theoretical floors in companies’ values. It also makes a lot of sense, intuitively, to pick up pipelines stuffed with potential blockbusters at extreme discounts.
I’ve watched Yee do this for years in various biotech-sector pullbacks, and typically this scenario is followed by meaningful rallies in these names, as negative sentiment toward biotech wore off. This seems already to be happening. But will it continue?
No one knows for sure, but sentiment moves in cycles, so it seems likely. In a recent chat with Yee, he cited three catalysts that could boost sentiment in biotech.
1. Elections. Once they’re over, investors will have better visibility into how the regulatory environment might shift in health care, or not, particularly in areas like drug prices. A split Congress would be a positive, because it would lower the odds that greater regulations would be approved.
2. Deal flow in the forecast. The end of the year and the start of a new one are often marked by stepped-up mergers and acquisitions, says Yee. If we get a repeat, that will draw investor attention to biotech and bid up stock prices.
3. Market reversal. A continued reversal of the recent market correction would boost risk appetite among investors. This, too, already seems to be playing out. Stepped up insider buying just signaled it’s a time to get more bullish. Plus, the end of the year and the first several months of a new one tend to be seasonally favorable times for stocks.
Here’s a look at three large-cap biotech stocks that are so beaten down, you get a good deal on their pipelines.
Gilead Sciences
Of course, to think you’re getting a pipeline at a steep discount, you have to be fairly certain that the core business is stable enough to hang in there. That seems to be the case with Gilead. Yes, it has a hepatitis C drug line up in Sovaldi and Harvoni, which is on the wane, in terms of growth. But this only represents a fairly small portion of revenue by now. Most of the rest of the revenue comes from HIV drugs like Viread, Truvada and Atripla, where the growth outlook looks OK.
Key patents on Gilead’s top HIV products will expire by 2021. So the pipeline is key.
Here, Gilead has promising nonalcoholic steatohepatitis (NASH) liver disease therapies in development, like Selonsertib. We should see the all-important Phase III data soon — in the first half of next year. Gilead is developing a rhumatoid arthritis and immunology therapy called Filgotinib in a partnership with Galapagos. They should file a new drug application over the next year or so, says Yee. You can also expect more chimeric antigen receptor T-cell (CAR-T) therapies like Yescarta for cancer, out of Gilead’s Kite Pharma division.
There’s another potential catalyst here. Later this year we could learn more about Gilead’s replacement for CEO John Milligan, who is stepping down at the end of 2018. That could remove an overhang.
Celgene
Celgene gets about two-thirds of its revenue from the cancer drug Revlimed. Most of the rest comes from Pomalyst for multiple myeloma, Abraxane (various cancers) and Otezla for psoriasis. These each net $1 billion to $2 billion in annual revenue.
The bad news here is that Celgene’s Revlimed starts going generic in four years. This has frightened investors out of this stock. So has the recent drawdown in the S&P 500 SPX, -0.07% and biotech names. But selling now is probably a big mistake, given the pipeline potential here.
“The key is they have the largest pipeline of drugs coming out over the next five years,” says Yee. Many drug candidates have multibillion-dollar annual revenue potential. Over the next few years they will either launch, or investors will see important study data for them.
These include: Ozanimod for multiple sclerosis and ulcerative colitis; Luspatercept for anemia; and Fedratinib for myelofibrosis, a bone marrow disorder that disrupts the body’s blood cells production. The company is also developing CAR-T cancer therapies. One is code-named bb21217, for multiple myeloma, which Celgene is developing in collaboration with bluebird bio BLUE, -1.04% Another is JCAR-17 for lymphoma, from Celgene’s Juno division.
“These drugs could add up to $5 billion in new revenue over the next five years, and Celegene is not getting credit for this,” says Yee. Celgene will provide updates on many of these drugs at the American Society of Hematology meeting in December.
Biogen
Yee’s estimated zero pipeline value for Biogen BIIB, -0.66% is $250 a share. Biogen’s stock got close in the recent market rout, when it fell to $287. It’s snapped back pretty fast to $312, as investors spotted the opportunity and biotech stocks overall rebounded. It’s now higher than that.
But Biogen is worth a quick mention as one to watch in any further market weakness, and because it still looks like a good deal given the potential.
Biogen has a strong underlying business in therapies treating multiple sclerosis, cancer and spinal muscular atrophy.
But it has potentially huge blockbusters in the works, in possible therapies for Alzheimer’s disease. The more certain one seems to be Aducanumab, which is in Phase III development. We won’t see final data until early 2020. Biogen is also developing another Alzheimer’s’ therapy code-named BAN2401 in collaboration with Eisai ESALY, -0.64% The results so far have been mixed and confusing, so the potential may be less clear. But to date, Alzheimer’s has eluded treatment. So Biogen’s stock will move up a lot on signs of progress, or success, for these drugs.
At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush has suggested GILD, CELG and BIIB in his stock newsletter, Brush Up on Stocks. Brush is a Manhattan-based financial writer who has covered business for the New York Times and The Economist Group, and he attended Columbia Business School in the Knight-Bagehot program.
