Biotech Breakouts and Takeover Targets

From Bloodbath to Bio-Boom

Written by Jason Simpkins
Posted May 13, 2016

Biotechs have suffered something of a bloodbath recently.

On the whole, biotech stocks are down 25% so far this year. That's how much the iShares NASDAQ Biotech Index (NASDAQ: IBB) is down, anyway. The SPDR S&P Biotech ETF (NYSE: XBI), is faring even worse, down about 30%.

Year-to-date, Biogen (NASDAQ: BIIB) is down 14%, Celgene Corp. (NASDAQ: CELG) is down 16%, Gilead Sciences (NASDAQ: GILD) is down 18.5%, and BioMarin Pharm (NASDAQ: BMRN) is down roughly 24%.

This might be concerning... if biotech stocks had not just completed the greatest bull run in the history of the industry.

Indeed, the aforementioned ETFs, IBB and XBI, are up 136.5% and 102%, respectively, over the past five years. That compares with a 51% gain for the S&P 500 Index. And prior to their recent regression, these two ETFs were up by as much as 273% and 267% at their 2015 peak.

So it's really no surprise that the bull market has finally taken a breather — one that coincides with a flat overall market and a flimsy global economy.

That's not to absolve biotech companies themselves, either. Some of them loaded up on debt or failed to live up to their promises. Others have been skewered in the media for price gouging, with bad actors like Martin Shkreli.

Still, as an investor, this the kind of collapse I relish in. Because fundamentally, the industry remains strong. Valuations are approaching bargain levels, as profit and revenue continue to grow. And M&A activity is heating up.

There are other reasons I like biotechs, too.

They aren't affected by commodities prices, or consumer sentiment. Patients and healthcare providers will continue to buy drugs even if the economy takes a turn for the worse. And while politicians may feign indignation at pricing scandals, it's hard to believe they'll actually do anything to put a lid on pharmaceutical prices — not if their handling of the financial industry is any indication.

Let's also not forget that the pharmaceutical industry has a powerful political lobby. That's especially beneficial in an election year, when candidates are looking for Super PAC sugardaddies.

Having said all that, though, the thing I like best about the biotech space is that it's driven by innovation.

Take Gilead, for example.

The company has come under fire for the sky-high prices it's charging for its hepatitis C drugs, Solvaldi and Harvoni.

Sovaldi's list price is $84,000 for a course of treatment. Harvoni's is $93,500. That's a lot to pay, but Gilead is getting away with it because its drugs are the best on the market right now. They come in tablet form, instead of injections, and they have better cure rates and shorter treatment times than the competition.

Turns out, when your drugs are better than everyone else's you can charge whatever you want. And it's legal, too. Anti-trust laws only come into play when there's anti-competitive behavior.

That's definitely not the case here, since Gilead is already facing pricing pressure from competitors. Yet, it still controls three quarters of the hep c market — again, because its product is superior.

Sales of Sovaldi actually increased 31%, to $1.27 billion in the first quarter, as Gilead posted revenue of $7.79 billion.

Furthermore, Gilead added a whopping $14.5 billion to its cash reserves last year, bringing its total stockpile to $26 billion.

It's got plans for that cash, too.

In addition to boosting its dividend, Gilead is buying back its own shares because they're relatively cheap right now.

The company shelled out more than $8 billion to buy back 46 million shares of its stock in the first three months of the year. That was at an average price of $92.09 per share, which is 7.6 times 2016 earnings.

It plans on spending billions more on buybacks this year, and is currently trading even lower, at about $82. (Gilead thinks its stock is cheap, and I don't blame them.)

Gilead is also looking for acquisitions. And that's another reason to be optimistic about the biotech industry.

Buyouts and mergers are a lot more enticing when valuations are this low.

AbbVie (NYSE: ABBV), which reported a 32% jump in first-quarter profit, recently agreed to buy cancer drug maker Stemcentrx for $5.8 billion. And Abbott Laboratories (NYSE: ABT) announced in April that it'd take over St. Jude Medical (NYSE: STJ).

One of the hottest names in the takeover arena right now is Medivation (NASDAQ: MDVN). Sanofi (NYSE: SNY) has already offered to buy the company for $9.3 billion. And Pfizer (NYSE: PFE) and Amgen (NASDAQ: AMGN) have reportedly launched competing bids.

Medivation stock has more than doubled since February, as a result.

Biogen has explicitly expressed interest in acquiring Acadia Pharmaceuticals (NASDAQ: ACAD). Its CFO recently said Biogen is willing to pay about two times EBITDA for acquisitions that are likely to be strategic buys.

Gilead and Teva (NYSE: TEVA) are rumored to be interested in Acadia, as well.

With a current market cap of $3 billion Acadia could actually be sold for twice that.

Some other potential takeover targets include: Kite Pharma (NASDAQ: KITE), Portola (NASDAQ: PTLA), Anacor (NASDAQ: ANAC), MacroGenics (NASDAQ: MGNX), and Xencor (NASDAQ: XNCR).

Basically, for an industry that's gotten hammered, the outlook for biotechs is quite bright.

The bigger, more established companies have been beaten down recently but are likely to rebound. They're also likely to absorb some of the smaller players, leading to significant gains.

The two ETFs I mentioned up top, IBB and XBI, are strong candidates for a rebound as well.

And finally, Nick Hodge recently stumbled upon a major biotech breakthrough that could double, triple, or even quadruple in value this year. I'd definitely recommend you check that out.

Fight on,

Jason Simpkins Signature

Jason Simpkins

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Jason Simpkins is Assistant Managing Editor of the Outsider Club and Investment Director of The Wealth Warrior, a financial advisory focused on security companies and defense contractors. For more on Jason, check out his editor's page. 

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