The biotech industry has had a rough year. The SPDR S&P Biotech ETF (OTC: XBI) currently sits 38% off of its 52-week high.
Biotech stocks as a group have suffered from increased regulatory and public scrutiny of drug pricing. This has cast a shadow over the entire group this year, and investors have responded by running for the exits. The selling pressure has compressed valuation multiples across the sector, but the good news is that there are now bargains out there that investors can take advantage of.
Investors on the hunt for value and growth should favor Biogen (NASDAQ: BIIB) and Gilead Sciences (NYSE: GILD) as biotech stocks to buy now.
Growth at a Reasonable Price
The reason why Biogen and Gilead stand out in the biotech industry is because their stocks are very cheap. Biogen and Gilead are valued at 17 times and 7 times earnings per share, respectively. This is a significant discount to both their historical averages, as well as the S&P 500, which is valued at roughly 20 times EPS.
These two biotech stocks to buy seem too cheap, given that their fundamentals are still in fairly good shape. Biogen grew first-quarter revenue by 6%, and earnings per share were up 26% due to cost controls and share buybacks. Gilead grew first-quarter revenue 2% to $7.8 billion.
Earnings should continue to be supported by their strong fundamentals and stock buybacks. Both companies generate a lot of free cash flow, which they use to reward shareholders with capital returns.
Biogen does not pay a dividend, but it does have an aggressive share repurchase program. It announced a $5 billion buyback last year.
In February, Gilead raised its dividend by 9% and unveiled a $10 billion addition to its stock buyback program. It has a 2.25% dividend yield, which is a nice added kicker. Gilead should easily be able to continue raising its dividend each year, and its buybacks should help grow future earnings.
Investors are concerned about their pipelines, which are critical to any biotech’s future growth. Biogen and Gilead both have strong pipelines. Gilead has 21 properties in its pipeline, and is poised to generate growth from new areas of focus including HIV. Gilead’s HIV business grew revenue by 19% last quarter.
Biogen has an entrenched position in multiple sclerosis. Over the past five years, the company grew total revenue by 21% per year, driven by its MS drugs Tecfidera and Plegridy. Tecfidera itself grew sales by 15% last quarter.
It should expand on its leadership in MS with Zynbryta, which management expects to be introduced in 2016.
Continued growth in MS will be supplemented by growth in new areas. Biogen can use its proven success in MS to grow in other areas of neurodegeneration, including Alzheimer’s disease Parkinson’s disease, and ALS.
Biogen has a very effective management team with a proven track record of achieving strong growth. Since 2011, it has grown annual free cash flow by 46%.
Growth Catalysts on the Horizon
The current political climate casts a shadow over the biotech industry in general, but this is a temporary headwind. It is likely that heading into 2017, investors will focus less on negative headlines and more on fundamentals.
It seems that the prevailing sentiment, which is very bearish on biotechs, does not match reality. Biogen and Gilead are still highly profitable. Their growth is slowing down, but they can return to growth through internal research & development or through acquisition.
Biogen ended last quarter with $7.8 billion in cash, marketable securities and long-term investments on its balance sheet. Meanwhile, Gilead holds $21 billion in cash and marketable securities on the books. This cash is sitting idle, and is likely earning little to nothing for shareholders.
Their existing pipelines should provide future growth. And, Biogen and Gilead can utilize their immense cash flow and cash on hand to either continue to invest in organic growth, or pursue a buyout of smaller firms with products they want.
The negative sentiment is likely short-term. Investors with a long-term focus have a great opportunity on their hands in these two biotech stocks to buy.
Disclosure: The author is personally long GILD.