Amgen, Alexion And Repligen: Biotech Stocks For The Long Haul

Daniel Cross, Kapitall: Biotech stocks are part of an industry that can be hard for investors to gauge, but here are three to consider. 

Many biotech companies spend years in development on a single product generating very little revenue, until it's finally released, which makes analyzing standard figures like price-to-earnings ratios highly misleading. Biotechnology has applications in every corner of the economy from drugs to improved food production to chemical and environmental protection.

[Read more from Kapitall: New PM Excites Market for Australian Raw Materials]

New drugs developed by a biotech firm must go through a lengthy three-stage approval process that can take between four and seven years. According to figures from the FDA, less than 1 in 10 drugs pass through every stage of the approval process to final implementation. This, coupled with large research and development costs, means a biotech company may spend an inordinate amount of time with negative earnings on a product that may not ever be approved for general use. This risk means it's extremely important to find companies working on multiple projects with a balance sheet that's capable of withstanding long periods of little or no revenue.

Here are three such biotech companies.

Click on the interactive chart below to see analyst ratings over time. 

All three have a positive operating margin, which means they have a relatively steady income stream versus their expenses. They also have current assets greater than three times in excess of current liabilities, giving them plenty of downside protection if a product has to be redesigned or the approval process takes longer than expected.

Amgen (AMGN) is a familiar stock for most investors. This $84 billion dollar company is currently engaged in heart failure and cholesterol drugs. The new drug, labeled AMG 423 is wrapping up Phase 2 testing by the first quarter of 2014 and expected to enter Phase 3 afterward.

Amgen recently acquired ONYX Pharmaceuticals for $10.4 billion. This gives the company a strong leg up in the cancer research market, predicted to be a $50 billion dollar industry by 2023, through ONYX's liver and kidney cancer drug Nexavar and a myeloma treatment drug called Kyprolis. The myeloma drug is currently only U.S.-approved, but is in Phase 3 trials for European markets – the results of which come in at the end of this year.

Amgen is a large company with a stable balance sheet. The company's current assets are $29.6 billion, while current liabilities are only $4.7 billion. $23 billion of those current assets are listed as cash and short-term investments, which gives Amgen a high degree of liquidity.

Now while Amgen appears to be fairly priced with a P/E of 19, that figure is subject to change as the company's new drugs pass through Phase 3, making earnings an unreliable figure. The company, unlike most biotech stocks, offers a dividend for investors of 1.7% that was implemented in the third quarter of 2011 and has already increased by over 67%.

Another large cap biotech company – at $21 billion – that has room for multiple R&D projects, is Alexion Pharmaceuticals (ALXN). Alexion primarily profits from its blood disease medication, Soliris. Further applications of this drug are being considered in instances of kidney transplants, neuromyelitis optica, and others. Current work on Asfotase Alfa for hypophosphatasia is in Phase 2 and is expected to bolster Alexion's already steady revenue stream.

Like Amgen, Alexion has a strong balance sheet with current assets valued at $1.5 billion and current liabilities at $360 million. At first glance, the company's P/E ratio of 63 might give investors pause, but biotech stocks report mixed earnings due to the nature of their business and should be disregarded in favor of measurable attributes like drug development and limited liability exposure.

Due to the predictable nature of income generated by their flagship drug Soliris, which generated $1.1 billion in sales last year, revenue is more stable and reliable for Alexion as compared to a peer like Amgen.

Alexion has experienced tremendous growth, with earnings rising 40% in 2013 and 166% in the company's most recent quarter, as compared to the same quarter last year.

The third biotech company for the long haul is Repligen Corporation (RGEN), a small cap company of $307 million that develops and produces bio-processing products. The company's mainstay is OPUS, a line of disposable plastic chromatography columns that meets laboratories need for more efficient processing. Repligen also has a pancreatic imaging agent in Phase 3 and an orphan drug candidate in Phase 1 development.

Repligen has the strongest looking balance sheet of these three biotech stocks. Current assets are $80.9 million with current liabilities at $10.2 million. They also have cash value of $1.84 per share, which gives them a lot of room for R&D, share buybacks, debt payments, or anything else they might need. Repligen's cash position gives them wiggle room that few companies can match in times of economic uncertainty.

With Repligen's OPUS coming online, earnings have grown substantially – 180% for this quarter versus the same quarter last year. While the forward looking P/E is 39, like all biotech stocks, the ratio does not take into account the fluctuations due to product development time on new drugs.

Biotech stocks don't necessarily obey the same rules that other industries follow when it comes to fundamental analysis, but they can be measured by such basic metrics as debt and product development. The non-cyclical nature of the business means these companies aren't strongly tied to market conditions and tend to make uncorrelated moves, which could be used for portfolio diversification purposes. Positive margins and low debt make these three biotech companies strong competitors in an industry where earnings are unpredictable and technology changes rapidly.

Dig Deeper:  Compare analyst ratings to annual returns  for stocks mentioned.


(Daniel Cross, Kapitall writer.  Analyst ratings sourced from Zacks Investment Research. All other data sourced from Finviz. )


If you liked this article you might like

20 Stock Picks to Weather Any Storm From Trade Wars to Fed Rate Hikes

20 Stock Picks to Weather Any Storm From Trade Wars to Fed Rate Hikes

7 Hot Investing Bets to Make in Biotech

7 Hot Investing Bets to Make in Biotech

Stocks Get Boost From Stronger-Than-Expected Jobs Report

Stocks Get Boost From Stronger-Than-Expected Jobs Report

Stocks Higher After U.S. Adds More Jobs Than Expected in November

Stocks Higher After U.S. Adds More Jobs Than Expected in November

Alexion Spikes Amid Report Activist Elliott Management Is Pushing for Change

Alexion Spikes Amid Report Activist Elliott Management Is Pushing for Change