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3 High-Quality Biotech Companies for 4th Quarter

- By James Li

On Monday, GuruFocus' High Quality Screener listed three biotechnology companies that offer good potential ahead of the fourth quarter: Biogen Inc. (BIIB), Gilead Sciences Inc. (GILD) and Novo Nordisk A/S (NVO).


Invest "only" in good companies according to the "Oracle of Omaha"

Berkshire Hathaway Inc. (BRK-A)(BRK-B) CEO Warren Buffett (Trades, Portfolio) has stressed several times that key investing criteria include predictable earnings and strong economic moat. The "High Quality" Screener lists noncyclical companies that meet several criteria related to the company's financial strength and profitability:

  • Ten-year median return on equity of at least 15% and 10-year median return on capital of at least 16%.
  • Business predictability rank of at least 3.5 stars out of five.
  • Operating margin of at least 16%.
  • Ten years of profitability over the past 10 years.
  • Five-year revenue growth rate of at least 5% and five-year earnings per share growth rate of at least 10%.



As of Monday, the screener listed 20 companies, including three biotech companies.

Biotechnology industry overview

The biotechnology industry includes companies that engage in the production of drugs manufactured through natural ingredients like DNA. Even though such companies have high barriers to entry and research and development costs, biotech companies are considered noncyclical since demand for drugs and therapy treatments is not as sensitive to changes in the business cycle as demand for luxury and specialty retail.

Amgen Inc. (AMGN), Gilead, Biogen and Celgene Corp. (CELG) represent the top four U.S. biotech companies as Figure 1 illustrates.

Figure 1

Amgen meets all of the above criteria for high-quality companies except two: the company's financial strength ranks a modest 5 and its five-year earnings per share growth rate is -5.50%.

Biogen

Cambridge, Massachusetts-based Biogen develops and delivers therapies to patients for the treatment of neurological, rare and autoimmune diseases. GuruFocus ranks the company's profitability a perfect 10 on several positive investing signs, including consistent revenue growth and a strong Piotroski F-score of 7. The company's operating margin has increased approximately 7.40% per year over the past five years and is outperforming 96% of global competitors.

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Biogen CEO Michael Vounatsos said on July 24 that second-quarter revenues reached a record $3.4 billion, up 9% from the prior-year quarter on strong growth in the number of adult Spinraza patients. The company's revenue has increased approximately 12.10% per year over the past three years, a rate that outperforms 68% of global competitors. The company's business predictability ranks a perfect five stars on consistent revenue and earnings growth over the past 10 years.

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Among gurus with holdings in Biogen, PRIMECAP Management (Trades, Portfolio) and the Vanguard Health Care Fund (Trades, Portfolio) have the largest two positions as of June 30.

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Gilead

Foster City, California-based Gilead develops and markets therapies to treat life-threatening infectious diseases, including HIV and hepatitis B and C. The company's profitability ranks 9 out of 10 primarily due to a four-star business predictability rank and operating margins that have increased approximately 7.5% per year over the past five years. Despite this, GuruFocus lists several cautionary signs for Gilead, including a price-sales ratio near a two-year high and declining revenue over the trailing 12 months.

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Dodge & Cox, Pioneer Investments (Trades, Portfolio) and the T Rowe Price Equity Income Fund (Trades, Portfolio) have the three largest holdings in Gilead.

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Novo Nordisk

Denmark-based Novo Nordisk manufactures and markets a variety of pharmaceutical products through its business segments, which include diabetes and obesity care and biopharmaceuticals. The company's financial strength ranks 9 out of 10 on several factors, including robust interest coverage and a strong Altman Z-score of 11.80. Novo Nordisk has approximately $74.47 in cash for every $1 in debt, suggesting the company has little or no problem paying its debt using cash on hand.

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Disclosure: As of this writing, the author owns shares in Biogen.

This article first appeared on GuruFocus.