Is this biotech stock good for the long term?
Kevin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the race to make the best drug for treating Hepatitis C four biotech companies have shown real promise. Idenix Pharmaceuticals, Inc. (NASDAQ: IDIX), Merck (NYSE: MRK), Gilead Sciences (NASDAQ: GILD) and Vertex Pharmaceuticals (NASDAQ: VRTX). Each of these companies are looking to do the classic biotech stock move (that investors love) by popping the valuation of its stock with an exciting new product. But some of these companies have a large enough cap that one or even two new products won’t make for a pop or long term gains. But one of these companies has enough going for it to provide growth and gains.
Idenix shares went into a free fall recently when its new nucleotide polymerase inhibitor IDX184 was put on partial clinical hold as the FDA studies due to toxicity concerns. Bold and risk taking investors that play daring short games may consider this a bump in the road for a solid company and see opportunity while more conservative investors will look to the more successful player(s) in this biotech race.
Merck is large enough that a new product needs to have a wide-spread consumer base to make a difference in stock valuation, dividend or any type of yield at all. Merck was one of the front runners in the Hepatitis C drug race but its entry, Victrelis, was beat out resoundingly by another entry.
Gilead Sciences makes GS-7977, a drug that doesn’t need interferon – a substance used in conjunction with Hepatitis C treatments known for causing unpleasant side-affects – and therefore offers real potential. Gilead is known for making the world’s top-selling HIV medication and has a cap big enough that a Hepatitis C drug will only have a minor impact on valuation.
That leaves Vertex. Its Hepatitis C drug Incivek is the first new Hepatitis C therapy approved in over a decade. With a market cap over $11 billion, Vertex isn’t likely to go way up on one drug, but Incivek has seen quarterly revenue of more than $400 million and is quite successful. But this biotech is also working on a Cystic Fibrosis treatment, Kalydeco, which received some undue negative press but is showing good results and may end up a real breakthrough.
While new products are the make and break factor for biotech stocks, other factors make Vertex attractive. The company is considered by analysts to be a top buyout candidate and most investors know what such an action can do to a stock’s value. Johnson and Johnson (NYSE: JNJ) has been speculated as a potential buyer since it has been a marketing partner for Incivek. Merck is another possibility although it would concern investors about its own Hepatits C research with such a move.
Looking into the fundamentals and particulars also makes Vertex a possible long term investment option. The current P/E is 29.21 compared to a forward P/E of 49.22. EPS is up by over 100% this year. According to the recent 8-K and 10-Q, Q2 sales in 2012 were $418.3 million compared to $114.4 million for Q2 of the previous year. This includes over $45 million in just royalty and collaborative revenues. Despite the cost of research and other outlays, total assets increased by $400 million in the first six months of 2012. Net income loss shrunk by two thirds quarter over quarter implying that the massive proceeds from Incivek combined with revenue starting to be generated by Kalydeco are having positive results on the bottom line.
All of this is combined with the fact that a company that looks to have produced two straight biotech therapy winners in a row has eight more products being developed. Adding everything up – recent successes, long term prospects for two new therapies, buyout potential, strong revenue growth, shrinking losses as R&D money is quickly recouped and several new products in the pipeline – Vertex looks like a winner. The valuation is currently around $54 down from a high of over $65 in May. This could likely be attributed to typical stock fluctuations given all of the positives involved and really just means opportunity. Invest wisely, invest boldly and make money, capitalism wants you to.
thedeswolf has no positions in the stocks mentioned above. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services recommend Gilead Sciences, Johnson & Johnson, and Vertex Pharmaceuticals. 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.