Health and Healthcare
5 Top Biotechs Where Future Multi-Billion Dollar Drug Pipelines are Valued Almost at Zero
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Sometimes market volatility and outside shocks create a rift between market prices and real value. That may currently be the case in the largest stocks in the biotech sector within health care if RBC Capital Markets is correct in its outlook.
Is it possible that the post-Brexit trading and other sector malaise in the biotech sector is valuing the companies so low that their future drug pipelines are being valued at almost zero?
RBC’s Michael Yee and his team believe that the post-Brexit volatility and other value-destroying risks have effectively valued some of the major biotech leaders’ future drug pipelines at almost zero. That would mean that the biotechs are valued just for existing drug franchises and their respective earnings and revenues.
When investors hear things like this, it is understandable that they may want to load up. It is important to understand exactly what the RBC team is highlighting and expecting.
RBC countered that notion and was quick to say that this is not calling a bottom. Yee even said he expects that biotech valuations will likely remain suppressed for the rest of 2016.
The problem here is that volatility and valuation discounting like this rarely disappears overnight. There is the ongoing risk of the political pendulum on drug prices and negotiation for future pricing. That could all keep a cloud over the sector, so any investors thinking they are getting a free call option or warrant on the top biotech stocks better understand that this could take quite some time to pan out.
24/7 Wall St. also added in trading data and consensus data from Thomson First Call to show what sort of growth may be seen ahead.
AMGEN
Amgen Inc. (NASDAQ: AMGN) was given a no-pipeline valuation range of $135.00 to $145.00 by RBC, versus a $146.00 current share price.
Amgen’s market cap is $110 billion, and it has a consensus analyst price target of $185.31 and its 52-week range is $130.09 to $181.81.
Amgen’s revenue was $21.66 billion in 2015 with earnings at $10.38 per share. Its consensus analyst targets for 2017 are $ 23.3 billion in revenues and $12.15 in earnings per share.
BIOGEN
Biogen Inc. (NASDAQ: BIIB) was given a no-pipeline valuation of roughly $225.00, versus a current share price of $228.00.
The company, which was still recently called Biogen Idec, has a consensus analyst price target of $336.33; and its 52-week range is $223.02 to $412.24. Its market cap is now just $50 billion after having fallen so much.
Biogen’s 2015 revenue was $10.76 billion, with earnings at $17.01 per share. The consensus analyst estimates for 2017 are $11.85 billion in revenues and $20.14 in earnings per share.
CELGENE
Celgene Corp. (NASDAQ: CELG) was assigned a valuation of $85 to $95 for a no-pipeline valuation. That is versus a $97.00 current share price and the biotech leader has a market cap of $75 billion.
Celgene’s consensus analyst price target is $136.38 and its 52-week range is $92.98 to $140.72.
Celgene’s 2015 revenue was $9.25 billion, with earnings at $4.71 per share. The consensus analyst estimates for 2017 are $13.02 billion in revenues and $7.00 in earnings per share.
GILEAD
Gilead Sciences Inc. (NASDAQ: GILD) was given a zero-pipeline valuation of roughly $75.00 to $80.00. That is versus a current share price of $81.00, but it is important to understand that Gilead may have the largest discount of all the biotechs due to its huge price tag for its Hepatitis-C drugs.
Gilead’s market cap is $108 billion and its consensus analyst price target is $110.90. Its 52-week range is $77.92 to $120.37.
Gilead shares were higher after another hep-C news break of a combination approval. Its 2015 revenue was $32.6 billion, with earnings at $12.61 per share. The consensus analyst targets for 2017 are $30.7 billion in revenues and $12.33 in earnings per share.
VERTEX
Vertex Pharmaceuticals Inc. (NASDAQ: VRTX) was given a zero-pipeline valuation range of $75.00 to $80.00 per share. That is versus a current $82.00 share price, and its market cap is $20 billion.
Vertex’s consensus analyst price target is $109.00 and its 52-week range is $75.90 to $143.45. RBC recently said it sees a bullish case even north of $120 if its “triple” study results are good in a recent report, but thinks cautious news could drive it under $80 before it recovers.
Vertex had revenues of $1.03 billion in 2015 and it generated a loss of -$1.01 in operating per share. Its consensus analyst estimates for 2017 are $2.55 billion in revenues and $3.32 in earnings per share.
24/7 Wall St.The RBC report is after numerous investors inquiries, and past buying opportunities were as when biotech is trading below the multiples of the S&P 500. Another issue is that a zero-value for a pipeline has generally been a good time for long-term investors to buy, but those investors better have a 12 month to 18 month outlook rather than looking for immediate gratification.
Still, RBC pointed out that this discounting lasted from the start of 2010 into June of 2011. That was on the heels of the financial crisis and was at the onset of the Obamacare being implemented. Investors just did not want to be big owners of health care (particularly biotech) at that time. Still, big catalysts took place from the likes of Biogen, Gilead and Vertex during and right after that period.
RBC sees the biotechs now varying from 6 months to 9 months into this discounting. The team there did note that it looks like the sector needs to get through the 2016 elections and get to more positive drug study in 2017.
As far as the valuations, RBC now sees major biotech being valued at 12 times to 14 times forward 12 month earnings per share. That is versus roughly 16 times the S&P 500 and 17 times Big Pharma valuations.
Michael Yee has Outperform ratings on each of these major biotech stocks. If you go back to a June 10 report, Yee and his team warned of political pricing risks against sales and earnings. That report said at that time:
Drug pricing pressure has reached a fever pitch, with the “rhetoric” polling well and prompting agencies like the CMS and AIDS Healthcare Foundation to seek drug price reductions through the introduction of new proposals such as Medicare Part B changes and the California Drug Price Relief Act (CDPRA) initiative, the latter which is not well known by the Street based on our discussions – and could cause headline risk due to what sounds like potential large price cuts for States… CDRPA’s intentions of reducing drug prices and saving taxpayer money sound good, but are unlikely to become a true reality, in our view… We think possible 2-3% EPS impact if it all went through across 50 states but it’s more headline risk than anything.
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