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The biotech industry hasn’t fully recovered from the Hillary Clinton-related sell-off.
Hillary Clinton, with a late September tweet, sent biotech investors scurrying. The presidential candidate had put together a rough plan to stop drug price gouging.
This included capping the amount patients have to pay for certain prescriptions and forcing pharma companies to reinvest in research and development — versus spending on marketing.
Since then politicians have been calling for a subpoena to force Valeant Pharmaceuticals International (NASDAQ: VRX) to explain why it recently increased the price for two of its heart drugs.
The iShares NASDAQ Biotechnology Index (NASDAQ: IBB) is now down close to 20% over the last three months. The selloff for some is justified, as it raises a lot of uncertainty over drug pricing going forward.
Meaning, the legislation risk is real for biotechs. However, we’re still a ways off from seeing actual reform that affects pricing. And even if we do eventually see it, not all drug companies will be affected. Big biotech is best when it comes to finding value in the industry.
The Biggest Biotech is Best
One biotech that’s been hit hard is Gilead Sciences (NASDAQ: GILD) and with a $145 billion market cap, it’s the biggest. Gilead shares have fallen 16% over the last three months.
Gilead is still hitting on all cylinders; it has seen a lot of success thanks to its hepatitis C and AIDS therapies. But one headwind has been the fact that its Sovaldi drug actually cures hep C, which means less repeat business. So great for patients but bad for recurring revenues.
But the focus should be on its other pipeline drugs, which includes even higher margin drugs for cancer and autoimmune diseases. Gilead got approval for its first cancer drug last year and is testing new HIV medications.
It still has a lot of opportunities for expanding Sovaldi worldwide too. Last month it tweaked Sovaldi, this time curing 99% of patients in just three months.
Gilead has remained the undisputed leader in the hep C market, withstanding a new all-oral drug from AbbVie (NASDAQ: ABBV) in 2014. It’s expected to command 80% of the global hep C market by year-end.
Another underrated opportunity: Gilead could purchase growth. It has been quiet on the acquisition front for years. The last major purchase was Sovaldi in 2011, which has been a huge success. The company has made smaller acquisitions since then, but remains disciplined, refusing to overpay.
With the recent biotech selloff, there could be plenty of opportunities. Gilead has upwards of $15 billion in cash on the balance sheet after a debt raise last month.
Great Margins and Dividend
The other week I talked about another quality biotech stock, Amgen (NASDAQ: AMGN), which had been beaten down due to overplayed competition concerns. It’s the first major biotech to start paying a dividend – currently yielding 2.2%.
But let’s not forget about Gilead’s dividend.
It made our top 5 dividend increases list in June when it first started paying a 43 cents a share dividend. Its dividend yield is now up to 1.7%.
Gilead has the best margins in the business, returns on capital and assets, and is the cheapest biotech around. Its margins are superior to peers as it works with a small sales force and stresses lean manufacturing. And there is more evidence that Gilead is the best biotech stock to buy now.
Shares of Gilead trade at a price-earnings ratio of right at 10, while Amgen is trading at 19 times earnings. Other major biotechs trade at P/E ratios of 40 and above. Gilead’s current valuation makes the company close to being the cheapest in its history.
Gilead has the market positioning, pipeline and balance sheet to keep putting up industry leading returns. It’s too cheap to ignore.
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