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July is shaping up nicely for the biotechnology sector. After a fresh bounce from the $108 low last month in June, the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB ) may make a new high this month for multiple reasons. First, the strong cash flow generation from drug stocks continued in the last quarter, despite market worries over the government limiting drug price increases. On July 3, the Financial Times reported that Pfizer Inc. (NYSE: PFE ) is increasing the prices of 100 of its drugs by around 10 percent. The drug giant's ability to raise prices sets the stage for a number of beat up biotechnology and pharmaceutical stocks to consider for July.
These drug price hikes are a positive development for biotech stocks because Pfizer's price hike on over 40 products signals profit growth for the industry. Value investors looking to buy in should stick with drug stocks trading at favorable valuations and whose business faces multiple positive catalysts ahead.
Here are 5 biotech stocks to get you started for July.
Pharma and Biotech Stocks for July: Regeneron (REGN)
The first biotech stock on the list is Regeneron Pharmaceuticals (NASDAQ: REGN ), which already started its rebound on the markets after the stock bottomed in May at $281.89. The stock is now up 15% in the last month and up 8% in the last week alone. At a 23.39 times P/E and a forward P/E of 16.85 times, Regeneron is relatively expensive compared to its established peers.
But the company earned the premium: Dupixent is a highly effective biologic that treats atopic dermatitis. Although Pfizer has EUCRISA (crisaborole), an ointment that is easier to apply, this product is expensive and has an efficacy of around 50 percent. By comparison, Dupixent's success rate is due to the drugs ability to decrease elevated IgE levels that are found in 80 percent of the atopic dermatitis subjects.
The addressable market for the disease is worth billions and Regeneron is a leader in this space. It is not stopping there. The company is studying the drug's efficacy for treating asthma and atopic dermatitis in adolescents.
Pharma and Biotech Stocks for July: Sanofi (SNY)
Source: Mike Mozart via Flickr (Modified)
Sanofi (NYSE: SNY ) is Regeneron's partner in the development and sale of Dupixent. So when Dupixent showed it had significant improvement in disease severity at 16 weeks for patients, Sanofi posted a press release about it. In the fourth quarter, the company reported revenue falling 2 percent to $8.691 billion. Pharmaceuticals fell 2.8 percent to $7.3 billion while vaccine sales rose 2.4 percent to $1.38 billion.
Diabetes and Cardiovascular was the biggest underperforming unit for Sanofi. As such, the company forecast 2018 EPS growing at just 2-5%. Investors, though, could get SNY stock at a discount at these levels. At a P/E of 18.75 and a forward multiple at 11.43 times, shareholders do not face too much risk holding the stock and get rewarded a dividend yielding 4.57 percent in the interim.
Even if investors are ignoring the potential price hikes for Sanofi's drugs, the dividend rate is assured. This is due to the Board of Directors raising the dividend for 24 consecutive years. And while revenue may stagnate, the company is investing at a healthy pace in R&D. It spent EUR 5.5 billion in R&D in 2017, or 15.6 percent of company sales. It has 74 projects in development, covering immunology, multiple sclerosis and neurology, oncology, rare diseases, and rare blood disorders, diabetes and cardiovascular, and vaccines.
Pharma and Biotech Stocks for July: Allergan
Source: Everjean via Flickr
Allergan (NYSE: AGN ) bottomed multiple times on the market at the $150 a share level. At a forward P/E of just 10 times, the stock is too inexpensive for value investors to ignore. Activists are nudging the company to re-focus on its core business by selling some of its businesses. Activist investor David Tepper sent a letter to the board trying to convince it to sell the woman's health and antibiotic unit. Allergan could raise $6 billion in cash instantly, if it went ahead and sold the woman's health line.
Allergan has a deep pipeline that includes approved drugs for diseases in the CNS and eye care space. It also has approvals and submissions for drugs in the medical aesthetics/dermatology space. In all, the pipeline implies the stock trades at around the 8.5-9x 2020 EPS estimates.
It is worth noting that Carl Icahn is also holding AGN shares.
Pharma and Biotech Stocks for July: Valeant (VRX)
Source: Wikimedia (Modified)
Valeant Pharmaceuticals (NYSE: VRX ) quarterly earnings report sent the stock to new yearly highs but that rally fizzled quickly. After topping $27.79 last month, VRX stock settled at $23 a share. Another strong quarterly earnings report in August might lift its share price even further. CEO Joe Papa and the management team are doing a tremendous job at turning around the broken company. It has shed non-core businesses at high prices to lower debt. Additionally, Valeant has increased R&D spending and hired more sales staff.
The latter move has already paid off: sales at Salix and B+L both improved last quarter.
In the first quarter, these two units helped the company beat its own revenue, adjusted EBITDA, cash flow, and adjusted net income targets. They accounted for 76 percent of sales in the period. Combined, the two segments grew organically by 10 percent.
Looking ahead, Valeant has SILIQ, DUOBRII and BRYHALI as new products to help turn the company's fortunes around.
Valeant's stock is still oversold. Markets refuse to recognize that the importance of the company refinancing its debt and pushing out maturities. Although Valeant's new name will become Bausch Health Companies this month, the business rebound at Salix and the B+L unit, along with the sale of more non-core businesses, should give the stock some upside potential.
Per Tipranks, Wall Street has an average price target of $22 . A number crunch using the EBITDA Multiples or Revenue Multiples model suggests that VRX stock trades at fair value .
Pharma and Biotech Stocks for July: Teva Pharmaceuticals (TEVA)
Source: Open Grid Scheduler (Modified)
Teva Pharmaceutical (NYSE: TEVA ), which is up around 14% in the last month, is still valued at a forward P/E of just 8.75x. Warren Buffett's Berkshire Hathaway (NYSE: BRK.A , BRK.B ) doubled its position in the company last quarter, signaling that the company is trading at a discount.
In Q1, Teva reported top-line revenue falling 10.4%. In North America, Copaxone sales fell 40.3% to $476 million as the company faced greater generic drug competition in the period. Revenue from Generics fell 23.1% to $1.088 billion. Sales in Europe performed better as Generics revenue grew 17.3% to $997 million. Copaxone sales rose 0.7% to $153 million. Teva raised its revenue forecast for 2018 to $18.5-$19 billion, up from a previous $18.3 billion to $18.8 billion estimates. Non-GAAP EPS will be as high as $2.65.
On its Q1 press release, Teva's CEO Kåre Schultz said that the company will meet its cost reduction target of $1.5 billion in 2018 and $3.0 billion by the end of next year. Despite the elevated debt levels (long-term debt to equity is around 2x), the company produced solid cash flow to cut its outstanding debt. It also issued debt and amended various covenants to add flexibility in its obligations.
Disclosure: Author does not hold shares in any of the companies mentioned.
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