Not Even Washington's Meddling Could Stop Biotech’s Biggest Comeback
Companies / BioTech Jun 18, 2014 - 06:55 AM GMTBy: Money_Morning
Michael A. Robinson writes: Late last month, I told you that biotech is one of the best ways to profit from the tech rebound. In fact, it was my “No Doz Opportunity No. 1.”
Somewhat ironically, a rollover in the biotech market was one of the proximate causes of the overall selloff in tech earlier this year.
And now I’m recommending that you invest in the company that purportedly “caused” the biotech market to roll over in the first place.
That’s because this company will be the biggest beneficiary of biotech’s comeback.
I bet you never knew irony could make you rich …
Bet on the Goat
Before I tell you more about this company, let’s review biotech’s recent fortunes.
Following a blistering run that saw it more than triple in less than three years, the bellwether Nasdaq Biotechnology Index (NBI)fell more than 20% from its late February high to mid-April. And the company I’m talking about today declined by almost exactly same amount during that period.
Since then, the NBI has quietly rallied to gain nearly 15% from its April 14 closing low. And the index is up nearly 8.9% for the year, nearly 70% better than the 5.25% gain the Standard & Poor’s 500 posted during the same period.
Now I’m going to tell you the inside story behind biotech’s rollover earlier this year.
And then I’m going to share with you the one company – like I said, the rollover’s goat – that stands to gain the most as biotech keeps climbing.
Politics as Usual
Instead of being based on industry earnings reports or regulatory news, much of the recent biotech rollover had its roots in Washington meddling. Back in late March, several members of the U.S. House of Representatives wrote to a leading biotech company complaining about the high cost of its new drug.
Of course, the mainstream media ran hard with this congressional criticism – widely publicizing the letter and amplifying complaints about the high price of drugs.
Then, piling on, the financial media “discovered” biotech stocks … and trumpeted any news that showed them under duress.
If there’s one thing I’ve learned in my 30 years as a tech investor, it’s that such adversity often shines a light on fantastic opportunities.
Despite all the recent media noise, biotech faces a very bright long-term future. The industry keeps coming up with new drugs at a time when an aging population practically guarantees improving sales.
In other words, this is a decades-long trend backed by growing demand and solid fundamentals.
And the company we’re going to discuss today is not only a perfect example of what I’m talking about, but it’s on a path to crush the market from here.
Catch This One on the Rebound
Consider the recent report by Credit Suisse showing that large-cap biotech stocks are a bargain. They were recently trading at 13.5 times estimated 2016 earnings.
Talk about a bullish report – the brokerage says that turns the dynamics inside out. Biotech was trading below the 14.2 times 2016 earnings estimated for the S&P 500, despite the fact that biotech firms tend to have faster rates of profit growth than their blue-chip brethren.
Predictably, that report got almost no media attention. Neither did the Nasdaq Biotech Index’s rebound.
That’s why I want you take a look at Gilead Sciences Inc. (NasdaqGS: GILD). Shares of the Foster City, Calif.-based company have out-rebounded both the broad market and the biotech sector. From their closing low on April 10, Gilead shares have regained nearly 23%.
This is just an amazing turnaround and shows what a powerful stock Gilead really is. And now is the time to pounce on Gilead. Due to its great products and its high profitability, the company’s rebound could soon turn into a rocket launch.
Would you believe it was the noise surrounding Gilead that put the biotech sector in a tailspin in the first place?
At issue was the cost of Sovaldi, a hepatitis C drug with a sticker price of $94,000 for a full regimen (when taken in combination with other drugs). When Congressman Henry Waxman, a California Democrat, heard about Sovaldi’s cost, he went ballistic, firing off an angry letter to the company’s CEO.
But let’s put that seemingly high price tag in perspective. The usual hepatitis C treatment – a liver transplant, when you can find one – costs $250,000. And that’s not counting $50,000 more for drugs needed to keep the body from rejecting the new organ.
In other words, Sovaldi costs less than the treatment it is replacing – making Congress’s complaints moot.
And make no mistake. Sovaldi is extremely effective and is targeted at a very dangerous disease that is on the rise. Left untreated, hepatitis C can cause serious liver damage, leading to cancer and death.
It can take a decade or longer for the blood-borne disease to present its symptoms so it can be diagnosed, which is why so many patients get so sick before their doctors know what’s wrong.
More than 150 million people globally are infected with hepatitis C. And here in the United States, according to the advocacy group the Hepatitis Foundation International, about 3.2 million suffer from the chronic condition.
No wonder Sovaldi was such a huge success. The compound racked up $2.3 billion in first-quarter sales for Gilead. That’s more than just a record for a new drug. It smashed analysts’ expectations by an incredible $1 billion.
Future Success
Hepatitis C is back in the news – underscoring the profit potential of the treatments. Last week, drug giant Merck & Co. Inc. (NYSE: MRK) said it is paying $3.85 billion to buy Idenix Pharmaceuticals Inc. (NasdaqGS: IDIX) to gain access to its hepatitis C drugs in development.
Merck said it was competing with other bidders, an indication of the field’s profit potential, and that’s why it agreed to pay three times the price of Idenix shares. They had closed at $7.23 a share the day before the announcement.
Some analysts have expressed concerns about the future of other players in the space, most notably Gilead. But I’m not worried.
First of all, analysts have known for at least two years that new hepatitis C drugs are coming on the market, and they’ve already priced that into GILD.
Second, there are huge numbers of people with various versions of the disease. No one drug can treat them all.
And third, the drugs Merck just paid a small fortune to acquire won’t hit the market for at least three more years. That gives Gilead plenty of time to establish a solid global network of doctors and patients committed to Sovaldi.
Moreover, Gilead has more to offer than just Sovaldi. It sells medicines and other therapies for the treatments of HIV/AIDS, heart and respiratory problems, and various cancers.
During the first quarter, sales of its cardiovascular disease medicines increased 9% from the year-ago period to $234.5 million. One of its HIV drugs increased by nearly 70%, while another soared 134%, for combined first-quarter sales of $466 million.
All of which brings up Gilead’s sterling financials. Trading at roughly $80 a share, GILD has a $123 billion market cap. It has operating margins of 48% and a return on equity (ROE) of 38%.
Moreover, two of its key ratios indicate a stock selling at a discount and priced for growth. GILD has a forward price-earnings ratio of just 10.4, or nearly 60% less than the ratio for the S&P 500.
It also has a (PEG) price/earnings-growth ratio of just 0.5, which is one half the “fair price” ratio of 1. On top of it all, it recently announced a $5 billion share buyback, which doesn’t count the $2.9 billion remaining from an earlier buyback announcement.
I think Gilead’s huge success with Sovaldi, its suite of other successful products, and its solid financial fundamentals proves exactly why it pays to follow Rule No. 2 of my five-part system for building tech wealth: Separate the Signal From the Noise.
This is one of those rare big-cap stocks with the kind of growth ahead of it that you usually associate with small-cap companies.
With its great fundamentals and a growing global market, you can count on Gilead to help you build your net worth for years to come.
Source : http://strategictechinvestor.com/2014/06/even-d-c-meddling-stop-biotechs-biggest-comeback/
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