3 Healthcare Stocks To Consider Buying
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In environment toxic with patent cliffs and legislative reform, the healthcare sector is in "wait-and-see" mode. The problem with staying on the sidelines until visibility improves is that you likely will be excluded from much of the upside. I find the sector substantially undervalued and recommend opening a long position in both large and small-scale companies. Below, I review the fundamentals of Bristol Myers (NYSE: BMY), Amgen (NASDAQ: AMGN), and Baxter (NYSE: BAX).
Bristol made headlines recently when it agreed to takeover Amylin Pharmaceuticals (AMLN). When you include assumption of debt, the size of the deal comes out to around $7B. With access to a larger patient population and a more diversified global footprint, Bydureon sales can now get the boost it badly needed for some time. When complemented with poising and new emerging products, Bristol is taking the necessary steps to dissipate fears over the Plavix patent cliff.
Burdened by the exclusivity loss of Plavix in mid-May, sales fell to $741M in the 2Q. Avapro fell 53% to $117M following its exclusivity loss late-March. With that said, sales in new products, like Baraclude, Sprycel, Yervoy, and Onglyza were, overall, pretty good. Going forward, Bristol has a late-stage pipeline that can help accelerate growth. Deutsche Bank projects free cash flow to pas $4.2B in 2014.
For all of the supposed risk in healthcare, Bristol is one of the safest stocks on the Street. It has less than half of the broader market's volatility and provides a nice 3.8% dividend yield. My concern, however, is about the upside. As I expressed above, there is a lot of price support from the downside; but, upside is somewhat limited at these multiples. Bristol trades at a respective 16.2x and 19.2x past and forward earnings with just 1.1% annual EPS growth forecasted over the next half decade. Accordingly, I recommend buying shares mainly if you want to hedge against macro uncertainty.
If you are looking for a biotech stock with more upside than Bristol, you, most likely, will have to accept more risk. Amgen may be a possible compromise given that the company is still less volatile than the market, is forecasted for 9.6% annual EPS growth over the next 5 years, and maintains low multiples. At a respective 19.5x and 12.3x past and forward earnings, Amgen is a worthwhile growth investment to consider buying.
The firm's lead candidate, hypercholesterolemia ("AMG-145"), is currently in Phase 2. Early clinical data has shown efficacy in reducing LDL-C, and full data should be released in 2H12. The market potential has been estimated by Jefferies at $1.5B with a target on statin-refractory/intolerant HeFH. The product is expected to enter Phase 3 in 2013.
All in all, Amgen is also attractive for its limited exposure to Europe, aggressive share repurchases, and use of hypercalcemia monitoring in QIP. If growth stabilizes in the ESA franchise, the multiples will be able elevate a bit - but most expansion will be coming from Prolia momentum over the near- and intermediate-terms. Sales growth has been very sluggish; so much of the value play arises from speculation over how successful pipeline developments are. Management also has an unusual amount of potential to grow margins by cutting costs where spending has become excessive.
Baxter is a medical device company that is currently rated 2.2 out of 5 where "1" is a "sell" on FINVIZ.com. In my view, the PE multiple of 14.7x is not too compelling at a forecast for 8.9% annual EPS growth. As a result of the Affordable Care Act, medical device makers will face a 2.3% excise tax on revenue regardless of weathering they churn a profit. This will diminish market supply and drive up costs on medical consumers. In the long-term, those consumers may search for different technology that limits dependency on firms like Baxter.
With that said, there are several reasons to be optimistic about the medical device maker. Baxter yielded impressive 2Q results and upped its 2012 guidance range. Market demand and capacity improved while management expressed confidence on plasma market growth. The firm is actually doing so well that it signed an agreement with Sanquin, a Dutch fractionator, for 1.6M liters of capacity by 2016's end. This deal provides greater flexibility before 2018 when the greenfield comes on line. Competitor success from long-acting FVIII will limit value creation through pricing pressure.
Going forward, greater clarity on HyQ, improving trends in the plasma market, and strong data from the hemophilia pipeline will help drive value creation. Fortunately, I am optimistic about the reentry of Octapharma. And even if Octapharma fails to perform, the company has label expansions in recombinant clotting factors between 2012 and 2014 to fall back on. The Alzheimer's market has also become hot with competitor development of solanezumab, so Baxter's current project on IVIG may be worth $10--according to Morgan Stanley--if the Phase III trial is successful.
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