Time to Buy These Biotechnology Companies?

Mohsin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The earnings season is in full swing with a number of stocks moving on earnings news. Allergan Pharmaceuticals (NYSE: AGN) and Gilead Sciences (NASDAQ: GILD) have announced their quarterly results recently. Their stellar results and guidance presents a buying opportunity to investors interested in health-care stocks. I have a buy rating on both stocks and believe they have a significant upside. 

Allergan

Allergan announced a much anticipated earnings report for its 4th quarter. The company has recently made an interesting acquisition of MAP Pharmaceuticals. The key investor concern from these earnings was the growth in its Botox franchise and guidelines for the next quarter. The street was expecting Allergan to report EPS of $1.18 and the company reported earnings of $1.21 (inclusive of tax credit), a 2% beat. The sales were mostly in line with street estimates of $1.51 billion. The improvement in the bottom line was driven by better than expected margins due to more effective cost management.

The company has also released full year 2013 earnings guidance.  Allergan expects earnings to be in the range of $4.75-$4.83 and sales in the range of $5.99 billion to $6.29 billion. There will be some additional sales from the acquisition of MAP Pharmaceuticals that have not been included in the guidance. This acquisition would also be the key to progress of Allergan migraine franchise. Allergan is now in control of Levadex which was the leading candidates of MAP. It is an orally inhaled version of dihydroergotamine mesylate (DHE) and provides a more convenient relief from migraines.

The stock rose approximately 1.6% due to a positive outlook for the year ahead. The company has also announced that it plans to sell its obesity unit. The obesity industry is becoming competitive pretty fast with Arena Pharmaceuticals all set to launch Belviq and Vivus’s Qsymia already on store shelves, figuratively. Due to its positive outlook for 2013, I am bullish on Allergan. The stock is trading at a P/e of 22x and 5% below mean sell side estimates. I have a price target of $119 based on a P/e of 25x and consensus earning estimates of 2013. 

Gilead Sciences

The company announced its 4th quarter earnings on Monday. The market was expecting Gilead to report EPS of $0.48 and revenue of $2.4 billion. The company reported an EPS of $0.47 and revenues of 2.59 billion. There was an 18% y/y increase in revenues and 9% y/y increase in earnings. The non-GAAP EPS for the quarter was $0.5, indicating a 4% beat.

The company has reported stellar results for the full year 2012. The revenues increased from $8.39 billion in 2011 to $9.7 billion, a 16% increase. There was a minimal impact of top line performance on the bottom-line due to increased expenditures on Research and Development. The non GAAP EPS for the period was $1.95 per share as compared to $1.93 in 2011.

There an overall increase of 18% in product sales which were $2.51 billion for the quarter. The antiviral products are the company’s leading revenue generator. The sales from Antiviral products were $2.17 for the quarter showing a stellar y/y growth of 20% in USA. Atripla was the largest contributor to the top line with revenues contribution of $863 million, approximately 35% of total revenues. This was closely followed by Truvada sales of approximately $832 million, a y/y increase of approximately 16%. The company has launched Stribild in August of last year and the product has shown promising sales of $40 million for the quarter.

Gilead is all set to profit from high growth in its HCV segment and earnings visibility from its Aids segment. I consider Gilead one of the best positioned biotechnology stock and have a PT of $54 on Gilead based on a P/e of 25x and consensus EPS estimates. These earnings reaffirm my faith in Gilead's continued growth and a stellar year ahead. 

 


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