Should You Buy & Hold These 3 Stocks?
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
To value BioPharma, you need to look at the future and consider long-term catalysts under the context of short-term negative catalysts. While many large drug manufacturers do face large patent cliffs and poor upcoming results from highly speculative candidates, it's the long-term that matters in the end. Below, I review 3 major producers with the focus being on a potential "buy-and-hold" strategy.
Bristol Myers (NYSE: BMY)
Pfizer isn't the only major biopharmaceutical company reeling from exclusivity losses. Bristol has seen Plavex revenue fall 96% from the loss of patent protection. This issue is of particular concern in light of the Supreme Court's recent "green light" on reviewing "pay for delay" practices whereby drug manufacturers pay generic producers to hold up on developing alternatives. "Pay for delay" has been estimated to contribute $3.5 billion each year to the top-lines of pharmaceutical companies.
Despite poor third quarter performance, which came below expectations, management guided to the upper-end of FY12 EPS $1.90 - $2 forecast, which is above expectations. While the positive surprise could send shares higher in the near-term, it's the long-term that matters for BioPharma. Here's what Bristol has ahead of itself:
- Blood thinner Eliquis showed an 81% reduced risk of vein and blood clotting compared to placebo. If approved, this product would contribute $4.2 billion by 2017, or $2.4 billion in present terms. This product, however, will be met by considerable competition: (1) Boehringer Ingelheim's Pradaxa and (2) J&J's Xarelto.
- The company's HCV (Hepatitis C) treatment had a good showing in the Phase IIb study. The candidate illustrated the efficacy of drug combinations by successfully producing a sustained virology response in patients. At the same time, this drug will come under considerable competition from Gilead (NASDAQ: GILD), the lead innovator in STD treatments. In its Phase III study, Gilead's HCV treatment sofosbuvir cleared HCV in nearly four-fifths of patients with genotype 2 or 3 HCV. Ultimately, I see more upside for Gilead's candidate in light of the company's proven role in this market.
Gilead, for example, has also delivered strong results in the HIV market. Its Atripla drug is the lead treatment and is about to be complemented by two other HIV drugs under development. Stribild, which is marketed at $28 thousand per patient, was approved in August 2012 for new treatment patients after a Phase III study demonstrated non-inferiority compared to Atripla and Truvada plus ritonavir-enhanced atazanavir. And Complera, another candidate for treating HIV, even showed statistical superiority to Altripa in adults with low baseline viral load and was non-inferior to those with high baseline viral load. Gilead trades at 16.9x forward earnings versus 17.8x for Bristol. Analysts are generally more enthusiastic about the former, and so am I.
Lilly (NYSE: LLY)
Lilly is cheaper than both at only 13x past earnings and a strong 4.1% dividend yield. Analysts are expecting a 4.7% annual EPS decline over the next 5 years, but I find that this is much too pessimistic. The median price target of $52.10 is also at only a 9% premium to the prevailing price. This pessimism has been reinforced by two negative catalysts in recent days: (1) the halting of tabalumab's Phase III study in rheumatoid arthritis patients and (2) a delay in seeking approval for Alzheimer's treatment solanezumab.
Solanezumab failed to produce positive Phase III data in patients with mild to moderate Alzheimers, and tabalumab produced a lack of efficacy altogether. With that said, the scientific background behind solanezumab is promising, since it did show greater blood levels of beta amyloid, a protein believed to be related to Alzheimer's, exiting the brain. Further, tabalumab is not "dead in the water" but will be studies in patients with systemic lupus erythematosus in two Phase III studies.
But then there are the positive catalysts that have gone under-recognized. First, management has showed an increased interest in targeting emerging markets. Strides Arcolab, an Indian company, recently partnered with Lilly in distributing cancer generics to emerging markets. Management has also said that they will expand offerings in China. Further, there has been a series of positive approvals. The EU has approved 5 mg of Cialis for treating prostatic hyperplasia, which is a good complement to its erectile dysfunction approval a decade ago. The FDA also gave the green light on Alimta, which can be taken by lung cancer patients after first-line treatment for maintenance therapy. The regulatory agency reached this decision in light of existing Phase III data indicating improved survival with maintenance.
Gong forward, there are several other positive catalysts. Type 2 diabetes treatment dulaglutide met its primary endpoint in three Phase III studies. An indicator of blood sugar, hemoglobin A1c, fell with minimal adverse side-effects upon treatment. Finally, a Phase III study for gastric cancer drug ramucirumab looks promising. This candidate also met its primary endpoint in increasing survival rate and even prevented the cancer from worsening. In light of Lilly's cheap price tag and favorable pipeline foundation, I encourage buying shares.
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