Prognosis Positive: Medical Growth Stocks to Watch
Matt is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Skyrocketing healthcare costs will not be solved by politicians. Why do I say this? Because, let me ask you, when have politicians solved anything?
Go ahead. Take your time. I’ll wait.
Politicians may struggle to tame medical costs, but medical research firms are new treatments for many of the world’s most devastating -- and costly -- diseases. This can lead to new less expensive cures and a healthier and more productive populace.
Investors can ride this trend by finding and buying pioneers with the technology that could lead to new treatments and current leaders that can both navigate the complex trial process, as well as buy out new companies with competing technologies and treatments.
It’s Fun to Make Drugs for RNAi
ALNY sounds like a Village People song. So does RNAi. But Alnylam (NASDAQ: ALNY) is actually a leader in developing drugs and therapeutics based on a biological process called RNA interference -- or RNAi. RNAi works to regulate gene expression and researchers see RNAi applications in treating everything from HIV to infections.
That’s why Alnylam’s stock has doubled in a year and a recent additional stock sale brought in more than $100 million into the company’s coffers. The sale sent the stock up about 10 percent in just a week and it’s now trading near its 52-week high.
Sounds good, but analysts are warning about the dilution of the stock. Increasing the number of shares can weaken demand and cause the stock price to rise sluggishly or fall, if Alnylam’s line of drugs and therapies disappoint, or get caught up in regulatory red tape -- all highly possible in the world of biotechnology.
For the buy-and-hold investor, the financials are not encouraging. Last year, the company’s earnings-per-share (EPS) was in the negative, -$1.36. In fact, the stock as consistently recorded negative EPS rates.
Earnings dropped from $100 million in 2010 to around $80 in 2011.
However, bee-bopping earnings and negative EPS rates are not necessarily unusual in the biotechnology industry.
Emergent BioSolutions Emerges
In this age of bioterrorism and pandemic paranoia, Emergent BioSolutions (NYSE: EBS) is a highly-regarded maker of vaccines and antibodies in the defense and healthcare communities.
That market does not look like it will vanish any time soon and the company has plenty of products in the pipeline, including Anthrax vaccines and possible treatments for lymphoma.
Unlike many companies in the biotechnology field, Emergent BioSolutions is a steady earning with compelling metrics.
Its PE is a solid 16.5, compared to the industry average of around 148.
Revenue has grown steadily from $178 million in 2008 to $273 million in 2011. (It did slip from the 2010 revenue of $286 million, but compared to other biotechs, that drop is a slight bump.)
The company’s EPS also increased steadily from .68 a share in 2008 to $1.68 in 2010, before sliding back to .68 a share in 2012. Again, it’s not a bad showing for a biotech.
If the pipeline products pan out -- say that three times fast -- Emergent BioSolutions will continue its revenue and earnings climb. With a low PE and a low stock price (the 52 week high as of this writing is $18.34), the company is an attractive combination for buy-and-holders and growth investors who can absorb a little risk for potential long-term growth.
Is There Sell in Celgene?
There’s something Darwinian about the biophamaceutical sector. The fittest survive and then they eat the weakest. Celgene (NASDAQ: CELG) would be on top of that evolutionary ladder.
It makes therapeutics for cancer and immune-related diseases. This is all cutting-edge, high risk stuff. But where Celgene is different from 90 percent of the other companies competing in this space is that they have a track record for regularly producing positive earnings.
The company’s one-year EPS growth rate is almost 50 percent; the three-year rate is about 36 percent. The 2011 EPS rate was $2.90 and the company looks like it’s on track to top that in 2012, although complete figures are not available just yet.
Celgene’s PE is a respectable 27 and it’s trading near the 52-week high of 100.05, as of the writing of this article.
Risks and Rewards
If you have more of a cushion for risk in your portfolio, Exelixis (NASDAQ: EXEL) is one of the few development-stage companies in the biotechnology industry that is also public.
That can be good.
And that can be bad.
Investing in a development-stage biopharmaceutical firm offers an investor the opportunity to own a stock that has nearly unlimited potential. But, you almost need a crystal ball, rather than a flurry of fundamental and technical data to measure the company’s worth.
Exelixis is no exception. The company’s revenue and earnings are not stellar. The EPS went from -$1.26 in 2009, to -.85 in 2010, then jumped into positive territory (.56) in 2011. Latest numbers indicate the company has an EPS of -.63.
In the development stage for most biotech firms, revenue and earnings -- everything that investors use to try to forecast future performance -- are negative and chaotic. For biotech firms, you have to go deeper -- into their partnerships and their pipeline -- to get a read (albeit a cloudy one) on its potential.
Here, Exelixis looks much better. They are partnering with Genentech, a leader among biotechs. They also have a considerable number of drugs that are in the pipeline and in clinical trials that are confronting some of the major health issues of our time, like prostate cancer and thyroid cancer. They also plan to create treatments for plant and crop protection.
The stock has declined over the year from around $6 a share to the mid-$4 a share level.
Just A Few Words of Caution
Investing in medical companies is tricky. A bad trial can wreck the valuation of an otherwise great company. Always analyze your risk tolerance and your ability to absorb losses when you’re investing in this field.
mlswayne owns Alnylam Pharmaceuticals . The Motley Fool recommends Emergent BioSolutions and Exelixis. The Motley Fool owns shares of Exelixis. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!