Is BioMarin Stock Oversold At $77?
After a 30% drop in August this year, at the current price of around $77 per share we believe BioMarin’s stock (NASDAQ: BMRN), a relatively small pharmaceutical company, looks oversold and it can offer significant upside. BMRN stock has moved from $120 to $78 in the month of August compared to the S&P which gained roughly 10%, with the resumption of economic activities as lockdowns are gradually lifted. BMRN stock is now down 18% from the levels it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. Furthermore, it is also down 12% from levels seen in early 2018.
Most of the decline of the last 2 years can be attributed to a contraction in the company’s P/E multiple, especially in August, after the U.S. FDA did not approve its promising candidate valoctocogene roxaparvovec gene therapy for severe hemophilia A in the late stage pipeline. Looking at fundamentals otherwise, the company has been doing well. Total revenue grew 30% from $1.3 billion in 2017 to $1.7 billion in 2019. BioMarin also managed to grow its net margins from 5.6% to 9.8% on a Non-GAAP basis, and this being partly offset by a 2.6% growth in total shares outstanding, translated into over 119% growth in BioMarin’s Non-GAAP earnings on a per share basis. Despite the steady top and bottom line growth, the P/E multiple has contracted. We believe the stock is likely to see significant upside after the recent decline. Our dashboard, ‘What Factors Drove -12% Change in BioMarin Stock between 2017 and now?‘, has the underlying numbers.
BioMarin’s P/E multiple changed from 210x in 2017 to 91x in 2019. While the company ‘s P/E is 84x now, there is a potential upside when we look at forward earnings growth. Note that a high earnings multiple is common for smaller pharmaceutical companies, with promising drugs in development. With 180 million shares and a stock price of around $77, BioMarin’s current market capitalization is around $14 billion.
So what’s the likely trigger and timing for further upside?
The global spread of coronavirus has resulted in postponement of elective surgeries, and fewer visits to doctors, especially in the quarter just ended, as health care institutions primarily focus on Covid-19 and other emergency cases. This directly impacts pharmaceutical companies, including BioMarin. That said, the company managed to post a 11% growth in sales while its earnings grew sharply to $0.32 per share compared to $0.10 in the prior year quarter, on a Non-GAAP basis. This can be attributed to a decline in R&D costs as well as SG&A expenses. The company has upheld its guidance and it will likely see both revenues and earnings growth for the full year, led by continued expansion of Kuvan and Vimizim, along with strong growth in Palynziq and Brineura. The opening up of economies will further aid the overall business growth.
Shifting focus to long term growth and the pipeline, the FDA’s rejection of Valrox in August was surely a setback for the company, but it is not that the treatment is ineffective. The FDA has asked for a two-year follow-up safety and efficacy data on all trial participants for Valrox. This essentially means a delay in approval, to probably 2022. On the European side, the company expects the verdict to come in early 2021. Note that Valrox is a potential blockbuster with peak sales estimated to be over $3.5 billion in 2030.
Overall, BioMarin appears to be poised for strong revenue and earnings growth, and Valrox is likely going to see a light at the end of the tunnel. While the stock is trading at 84x its trailing adjusted earnings, and the number optically appears to be high, we believe the stock could offer significant upside for investors willing to invest for the long-term.
Looking at the broader economy, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of a sustained uptick in new cases could spook investors once again.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.