Biotech stocks sometimes have a stigma of being highly speculative and highly risky. But several large biotech stocks generate impressive cash flow and have promising growth prospects. And they're not all priced for perfection, either.
We asked three Motley Fool contributors to weigh in on which biotech stocks they like. Here's why they chose Celgene (NASDAQ: CELG), Exelixis (NASDAQ: EXEL), and Gilead Sciences (NASDAQ: GILD) as their top picks to buy right now.
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Too cheap to ignore
Brian Feroldi (Celgene): Would you believe that a publicly traded company exists today that is expected to grow its profits by 19% annually over the next five years and yet only trades for eight times forward earnings? Believe it or not, but that's exactly what's happening with biotech giant Celgene today.
While Celgene has been a monster winner over the long term and grew its profits by 25% annually over the past five years, the narrative on Wall Street right now is that Celgene is dead money. That view does make some sense given the recent pipeline blowups; slowing sales growth of Otezla; and upcoming loss of patent exclusivity for its top-selling drug, Revlimid, in 2022. When combined, management had to dial back its long-term growth projections, which isn't something that investors like to see.
Despite all the negativity, Celgene continues to offer investors reason for long-term optimism. The company has five potential blockbuster drugs that could be brought to market by 2020, and success could go a long way toward replacing the eventual lost Revlimid revenue. While investors wait for that to happen, management continues to plow billions into stock buybacks while growing revenue and earnings at double-digit rates.
On top of it all, management is projecting that sales and earnings per share will reach $19 billion and $12.50, respectively, by 2020. When compared with today's price of about $88 per share, investors are getting this cash-gushing biotech giant for a song.
There may be real opportunity amid the market's fear
Chuck Saletta (Exelixis): The market has recently punished cancer therapy pioneer Exelixis over fears that its blockbuster treatment Cabometyx would be facing more intensified competition. Yet even if those fears are legitimate, Exelixis' shares look like they fairly reflect the risk.
Even the recent Morgan Stanley underweight rating on Exelixis shares set a target price of $19 for its shares. With a recent market price of $16.97, that represents around a 12% upside. When even its bears think a company's stock has the potential for a double-digit return percentage, that's a sign there may very well be value in its shares.
As for that value, Exelixis trades at around 15 times its anticipated earnings, and despite the competitive pressures, analysts are currently expecting strong double-digit earnings growth over the next five years. That potential earnings growth combined with a reasonable price relative to those expected earnings does provide a decent value for investors today, should those earnings materialize.
In addition, should that expected competition stunt its growth prospects, Exelixis has a solid balance sheet with far more cash than debt currently on it. That gives it financial flexibility to handle a reduction in revenues and still live to fight another day.
After all, like most good biotech companies, Exelixis has a solid pipeline in clinical trials designed to help deliver future revenues, assuming the compounds show sufficient promise during testing. New revenues can take away the pain of prior losses, and with that solid balance sheet offering it time for the tests to complete, Exelixis has the potential to recover even if the short term does prove tough.
Certainly, there's risk in investing in biotech stocks. With today's market price for Exelixis, however, investors look to be adequately compensated for those risks, making now a great time to consider purchasing its shares.
A turnaround story in progress
Keith Speights (Gilead Sciences): Plunging sales for its hepatitis C virus (HCV) franchise has given many investors a bad opinion of Gilead Sciences. The one-time winner has seen its revenue and earnings tank as HCV sales outweighed the positives from its other drugs. However, I think that Gilead is a turnaround story in progress.
It's been a long time coming, but Gilead's HCV sales now appear to be stabilizing. Although these drugs aren't going to be a source for growth anymore, they'll kick in nice cash flow for years to come. More important, stabilization means that Gilead's other products can now move to front and center in the eyes of investors.
The biotech's HIV franchise continues to dominate. In particular, Biktarvy, which was launched earlier this year, seems likely to become the most successful HIV drug ever. The drug is so effective that Gilead doesn't plan on developing another HIV pill. However, Gilead is working on a long-acting injectable for HIV and a potential cure for the disease.
Thanks to its 2017 acquisition of Kite Pharma, Gilead is also a leader in cell therapies for fighting cancer. Yescarta is steadily gaining momentum and appears on track to become yet another blockbuster success for the company.
Perhaps the best news of all is with Gilead's pipeline. The biotech recently reported positive results from a phase 3 clinical study evaluating filgotinib in treating rheumatoid arthritis. Gilead's nonalcoholic steatohepatitis (NASH) pipeline candidates provide even more reason for optimism.
With all of these factors working in its favor, plus an attractive valuation with shares trading at only 11.5 times expected earnings, I think Gilead's turnaround should pick up steam over the next few years.
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Brian Feroldi owns shares of Celgene. Chuck Saletta has no position in any of the stocks mentioned. Keith Speights owns shares of Celgene and Gilead Sciences. The Motley Fool owns shares of and recommends Celgene, Exelixis, and Gilead Sciences. The Motley Fool has a disclosure policy.