Large-Cap Biotechs: Who Ya Got?
Spencer is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While many biotech traders focus on simply trading, or gambling, on micro or small-cap biotech stocks there are several large-cap biotechs that are well worth a long term investment. Three biotech firms with an outstanding medium term (1-5 years) outlook are Regeneron (NASDAQ: REGN), Gilead (NASDAQ: GILD), and Amgen. Of these three, Gilead has the best short term potential and investors that realize this early will be rewarded very nicely.
Regeneron's share price is exhausted
Even though Regeneron has been one of my favorite stocks over the past few years, after a 150% rally during the first four months of 2012 – courtesy of strong sales results from the November FDA approved Eylea – I am concerned that the near term upside is very low compared to the safety profile of larger cap stocks such as Gilead and Amgen. On the other hand, Regeneron has increased the firm’s full year 2012 sales guidance for Eylea from $250-$300 million to $500-$550 million after the first quarter, and again from $500-$550 million to $700-$750 million after the second quarter. Because of these increases, the share price rallied at an incredible rate and I believe we will see some consolidation over the next few months.
Gilead is doing all the right things right now
Compared to Regeneron, Gilead has essentially been there and done that. Regeneron's first FDA approved drug came in 2008 with Arcalyst. By 2008, Gilead had a dozen drugs approved and marketed. Nevertheless, Gilead's most recent approval, Truvada, and the upcoming approval of Quad will help to drive Gilead's share price to new levels. Truvada was initially approved in 2004 as an antiretroviral agent to treat HIV-1 infected patients and last month Truvada was approved to reduce the risk of HIV-1 in HIV negative adults. In other words, Truvada is the first treatment intended to prevent HIV when used in combination with safer sex practices.
To go along with Truvada, the Quad – a combination of four HIV medicines – will likely receive FDA approval later this month to treat HIV-1 infected patients. Not only does Gilead have Truvada and the Quad in its wings, but the firm recently released positive phase three data for Elvitegravir and Cobicistat (both of which are included in the Quad). These will without a doubt allow Gilead to reach more of the HIV market as each drug is more specific and both either outperform or at the very least are non-inferior to previous HIV treatments.
With big rewards comes big competition
Gilead may be churning out new drug applications to treat HIV left and right; but the truth is the global HIV/AIDS market is estimated to reach $13.7 billion in 2016 and $16.5 billion by 2021 for the U.S. and major EU countries. The global estimate can be increased significantly in time as less developed countries become more developed and HIV/AIDS treatments are able to reach those populations.
This is important because major pharmaceutical companies will be looking to capture these profits. GlaxoSmithKline’s (NYSE: GSK) dolutegravir has already shown signs of being superior to Gilead’s $3.2 billion per year HIV treatment Altripla and Quad. GSK is in the process of two more phase three trials for dolutegravir, but these should be completed in the fourth quarter of 2012. Dolutegravir's superiority over Altripla, Quad, and Merck’s (NYSE: MRK) $1.4 billion per year Isentress make it a possible market leader for HIV integrase inhibitors if approved.
It is important to note that Gilead’s Elvitegravir also proved to be superior to Isentress. Therefore Gilead will have a major player in the integrase inhibitor market. Not to mention Quad and Elvitegravir will likely reach the market long before dolutegravir.
The key to take home is that a stock such as Regeneron is trading in anticipation of spectacular earnings growth from Eylea while Gilead’s stock trades closer to true value and will continue to grow as investors see the sales results and market share of Gilead’s new HIV treatments. Investors should expect to see Regeneron’s share price slowdown in the coming months while Gilead’s stock price will continue a slow and steady upward trajectory. Not to mention if Regeneron faces any hiccups the share price will crater. I do not expect this to happen, but it is definitely a serious possibility. We may also see some slight anticipation trading take place as traders expect to see at least one of Gilead’s new HIV treatments become a multibillion dollar per year earner.
Fool Blogger Spencer Knight is currently long REGN. The Motley Fool owns shares of GlaxoSmithKline and Intel. Motley Fool newsletter services recommend Intel and NVIDIA. 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.If you have questions about this post or the Fool’s blog network, click here for information.