- Biotech stocks have rallied, as several analysts believe low valuations are too good to pass up.
- Big industry names have been able to benefit from the hike prices of key drugs; strong demand has spurred sales.
- Motifs mentioned: Biotech Breakthroughs
- Johnson & Johnson (NYSE:JNJ), Celgene Corporation (NASDAQ:CELG), Amgen, Inc. (NASDAQ:AMGN), Biogen Inc (NASDAQ:BIIB), Gilead Sciences, Inc. (NASDAQ:GILD)
Don’t look now, but biotech stocks could be getting a jolt as a number of earnings reports are expected this week.
After plunging for the first month or so of 2016, the sector is on the upswing as lower valuations have enticed buyers who still see strong futures for the industry’s biggest names.
The Biotech Breakthroughs motif has risen 11.1 percent in the last month. During this time, the S&P 500 has gained 2.7 percent.
Over the last 12 months, the motif has fallen 10.7 percent; the S&P 500 is down 1.2 percent.
Some investors got bullish after strong earnings reports earlier this month by Johnson & Johnson (NYSE:JNJ) and Roche; both posted stronger-than-expected revenue in their respective pharmaceutical divisions.
Leerink Partners analyst Geoffrey Porges wrote in a research note that the companies’ upside came mainly from their large specialty pharmaceutical brands, which appear to have benefited from “very robust realized price increases in the US market, and less adverse exchange effects compared to prior periods.”1
Specifically, Porges’ analysis of Johnson & Johnson’s product sales suggests that at least 70-80 percent of the list price increases taken cumulatively over the last 12 months seem to be flowing through to reported sales.2
Porges wrote that he has been “impressed” by the magnitude of the price increases taken by large-brand biotech names. For example, in a case like Amgen’s Enbrel arthritis drug, the company’s strategy resembles that of a traditional “small molecule” brand company as it approaches competition from generic drugs — with “short-term cash maximization via price becoming their dominant strategy.”
Eyes on revenue growth
Porges further noted that many investors will be surprised that these price increases are likely to flow through to actual sales growth, with that growth more than offsetting any volume weakness in the first quarter — and resulting in “significant positive revenue surprises” for these companies when they report results.
And there could be more to come: companies have continued to aggressively increase prices, including Celgene Corporation (NASDAQ:CELG) in the second quarter with a 1.75 percent increase for its Abraxane cancer drug, and a nearly 8 percent hike for its Otezla psoriasis treatment – and this came after increases for both drugs in early January.
To Porges’ point of view, this pricing dynamic has boosted his conviction that the same bounty could be in store for large-cap biotech names, including Amgen, Inc. (NASDAQ:AMGN), Biogen Inc (NASDAQ:BIIB) and Gilead Sciences, Inc. (NASDAQ:GILD), all of which combine for 48% weight in the Biotech Breakthroughs motif.
Indeed, two days after Porges’ note, Biogen stepped up the plate with earnings that beat Wall Street’s expectations as sales of its key Tecfidera multiple sclerosis drug jumped 15%.
The company’s Tecfidera was performance was relatively huge, considering safety concerns about the drug had contributed to an unexpected sales slowdown last year, which went a long way to help batter down the stock throughout 2015.3
But now, as Barrons.com pointed out, the company’s key drug has stabilized while the company goes through a major restructuring and can still offer one of the “most promising” experimental drug pipelines in the industry.
In addition, with the company reportedly exploring the sale of its hemophilia drug business, its $6.8 billion cash pile could grow even higher, spurring more acquisitions and share buybacks.
Barrons.com highlighted the fact that Biogen’s stock – priced at 15 times expected 2016 earnings — has rarely been this “cheap” in the last five years due partly to growth concerns.
Clearly, the spark in sales of its key product has been enough for some investors to get on – or back on – Biogen’s bandwagon. We’ll see if the same happens for Amgen and Gilead when they report later this week.
- Ben Levisohn, “Why Johnson & Johnson’s Earnings Are Good News for Big Biotech,” barrons.com, April 19, 2016.
- Ben Levishohn, “Why Biotech Will Benefit from Higher Drug Prices,” barrons.com, April 20, 2016.
- Johanna Bennett, “Biogen: Biotech Bargain,” barrons.com, April 21, 2016.
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