Value in Biotech: Do Low P/E Ratios Make For Cheap Stocks? (AMGN, BIB, CEPH, CBST, GENZ, PDLI)

August 22, 2009 · Filed Under Cancer, fda, multiple sclerosis, politics 

Biotechnology has historically been a very tough segment for investors to find “value” in.  Usually, the multiples of earnings and revenues are high and many of the emerging companies have no revenues or earnings and will not for years to come.  Yet we recently found a study of biotech analysts, investors, and portfolio managers from BIO and Thomson Reuters which showed how many influential investors in the new tougher world of lower valuations are looking at traditional low-price/earnings ratios and other traditional investment valuation metrics in evaluating biotech stocks.  So this week we ran a screen of some of the top 50 biotech stocks and wanted to review the following companies:

Amgen Inc. (NASDAQ: AMGN)
Biogen Idec Inc. (NASDAQ: BIIB)
Cephalon Inc. (NASDAQ: CEPH)
Cubist Pharmaceuticals Inc. (NASDAQ: CBST)
Genzyme Corporation (NASDAQ: GENZ)
PDL BioPharma, Inc. (NASDAQ: PDLI)

In each of these we reviewed the share prices and why these are trading where they are.  We also gave detailed data from Thomson Reuters for 2009 and 2010 consensus earnings and revenue estimates, as well as what their forward P/E and Times-Revenues figures are.  Also included are average analyst target prices and any recent calls.  We also gave the caveats, issues, or suppositions behind each company and a layout of what lies ahead.  We also had a market cap criteria, and while all of these companies are over $1 billion in market cap we were willing to look down as low as $400 million.  These six companies also greatly exceeded our average daily volume minimum of 250,000 shares.

Lastly, these were reviewed alphabetically rather than by any order of preference because each company and each case is rather unique.

Amgen Inc. (NASDAQ: AMGN) trades at $60.64 and it has recovered handily off of its lows as the 52-week range is $44.96 to $66.51.  Analysts still have an average price north of $70.00, and this is now back to the largest independent biotech operation with a market cap of $61.5 billion.  Estimates for 2009 are $4.88 EPS and for 2010 they are $5.10 EPS.  Revenue projections for 2009 and 2010 are $14.69 billion and $15.54 billion, respectively.  Amgen has had some drug safety and reimbursement rates for quite some time, to the point that we have argued before how it is the largest biotech and trades just like a good old fashioned Big Pharma stock.    It would be easy to go on and on over EPOGEN, NEOUPOGEN, and ENBREL, but the most obvious issue here is that it is still under reimbursement risk and President Obama specifically targeted out “anemia” where generic biologicals are needed.  If that targets one company out, it is Amgen. So its forward P/E multiples are 12.4 for 2009 and 11.8 for 2010.  Both seem cheap for the company that is now the largest independent biotech stock, but the political and reimbursement issues trump side effect issues here.

Biogen Idec Inc. (NASDAQ: BIIB) has continued its realm of woe trading ever since its TYSABRI drug for MS came up with PML cases, even though these are extremely rare and even though TYSABRI is arguably the best MS drug on the market.  If TYSABRI is not the best MS drug, then its AVONEX is.  At $49.97, it has climbed back to within striking distance of the highs of a $37.21 to $55.34 range over the last 52-weeks. Analysts have average price targets around $52.00 and its market cap is also $14.4 billion.  Estimates for 2009 are $3.91 EPS and for 2010 they are $4.30 EPS.  Revenue projections for 2009 and 2010 are $4.38 billion and $4.58 billion, respectively.  TYSABRI remains the biggest issue with Biogen over those PML cases as a side effect of the drug.  Each new case brings a significant drop in Biogen shares prices because of concerns that MS users will go back to AVONEX or to rival treatments.  And now it and partner Elan Corp. plc (NYSE: ELN) are in court as Biogen is alleging that an Elan deal with Johnson & Johnson (NYSE: JNJ) breaches the contract over TYSABRI.   This case could make any and all projections a wild card.  Carl Icahn also wanted this one to be shopped, but he has had no serious luck there. As it stands today, Biogen trades at just over 3-times this year’s revenue expectations and forward P/E ratios are 12.8 for 2009 and 11.6 for 2010.  The biggest risk for investors here is that at any time of any day a headline or SEC filing can come up disclosing another PML case in TYSABRI, and we have seen how that destroys shareholder value above and beyond what a stock chart indicated.

Cephalon Inc. (NASDAQ: CEPH) is a well entrenched player in the biotech sector, yet it has been under pressure.  At $56.90, it is toward the bottom of its $52.55 to $81.35 trading range over the last 52-weeks and its market cap is $4.25 billion.  Estimates for 2009 are $5.74 EPS and for 2010 they are $6.39 EPS.  Revenue projections for 2009 and 2010 are $2.23 billion and $2.44 billion, respectively.  One issue is that its former growth seems to have slown down, but it trades at less than 2-times revenues and forward P/E multiples are 9.9 for 2009 and 8.9 for 2010.  What is interesting is that this stock slid hard with the market in February and only enjoyed a small bounce when the market showed a strong March recovery.  Then it rolled over in may when the market was strong again  and has been very weak since then.  Analysts still have a price target north of $75.00 for this stock.  Here is the company’s current drug portfolio:

  • NUVIGIL® helps to improve wakefulness in patients with excessive sleepiness associated with obstructive sleep apnea (OSA), shift work sleep disorder, also known as shift work disorder (SWD), and narcolepsy.  PROVIGIL® was the first in a new class of wake-promoting agents.
  • TREANDA® (bendamustine HCl) is a novel chemotherapeutic agent first approved for the treatment of  chronic lymphocytic leukemia and a second approval for the treatment of patients with indolent B-cell non-Hodgkin’s lymphoma.
  • AMRIX® is a skeletal muscle relaxant indicated as an adjunct to rest and physical therapy for relief of muscle spasm associated with acute, painful musculoskeletal conditions.
  • FENTORA® is the first and only buccal tablet indicated for the management of breakthrough pain in opioid-tolerant patients with cancer, and the first tablet formulation of fentanyl approved for any use.
  • TRISENOX® is an injection therapy for acute promyelocytic leukemia (APL).
  • GABITRIL® is an adjunct therapy for treatment of partial seizures associated with epilepsy.
  • ACTIQ® is for the treatment of breakthrough pain in opioid-tolerant cancer patients.

Cubist Pharmaceuticals Inc. (NASDAQ: CBST) is a wild card stock in the biotech sector because it is a value stock and it has also been rumored on and of in the past to be a buyout candidate.  With a share price of $19.89, it is back in the middle  of a 52-week range of $13.81 to $28.74 and its market cap is $1.15 billion.   Estimates for 2009 are $1.35 EPS and for 2010 they are $1.65 EPS.  Revenue projections for 2009 and 2010 are $564.9 million and $669.9 billion, respectively.  Analysts are also mixed here as the average price target is around $21.00.  Its lung transplant Phase II study met the endpoint for lung transplant patients, but what has been of the biggest interest for us in the past its CUBICIN that has been used in over 500,000 patients for MRSA skin and bacteremia (Methicillin Resistant Staphylococcus Aureus).  This is the one used to fight so many of those darned staph infections that are acquired in the hospital or are transmitted in-clinic. It has a drug pipeline with solid partnerships to boot.  It trades at roughly 2-times this year’s expected revenues and forward P/E ratios are 14.7 for 2009 and 12 for 2010.  Interestingly enough, this company has beaten earnings estimates on the surface for its last four earnings releases.  A big surprise here for Cubist is that this stock has been punished in the manner it has been and perhaps the larger surprise in our view is that it is still an indpenedent company.

Genzyme Corporation (NASDAQ: GENZ) just made our list of “the unusual suspects” over at 24/7 Wall Street based on its recent attempts at recovering from harsh share losses.  At $53.57, it gave the highest close for August on Friday, but its 52-week trading range is $47.09 to $82.99.  As it has lost over one-third of its value, the market cap is now $14.5 billion.  Estimates here are tricky because they have been in a state of change due to recent delays and manufacturing issues. Estimates for 2009 are $2.46 EPS and for 2010 they are $4.13 EPS.  Revenue projections for 2009 and 2010 are almost $4.7 billion and over $5.7 billion, respectively.  Genzyme is probably the least of the classic “Low P/E” stocks in this entire review.  Had it not had the manufacturing issues, its earnings estimates from analysts would not have been chopped down by almost one-third for 2009 and by 10% for 2010.  And had its share price not tanked so much, it would have been classified as a premium growth biotech stock.  Manufacturing and plant issues brought by the FDA and not adequately addressed by Genzyme  have also allowed a tiny Israeli company called Protalix BioTherapeutics Inc. (PLX) to get further on the map with possible competition as Genzyme’s flagship product has issues attached to it.  Cerezyme is used to treat Gaucher Disease, a rare but life-threatening genetic disorder. The company did recently take the first of what will be several image-repairing steps to remedy this situation, but Genzyme has a tough road ahead.  It is not cheap on a current-year forecast, but its P/E ratio for 2010 is now only 13.  If this one was not having the manufacturing and FDA issues and had its estimate of $4.50 less than 60 days ago, then this would be trading at 12-times 2010 expected earnings.  The real problem is that, again, there are many caveats in these estimates.  Genzyme is cheap on a forward basis for 2010, but the caveats are endless.  It is almost entirely and “if” scenario.  For whatever this is worth, Leerink Swann just raised its rating on Friday to “Outperform” based upon its efforts and valuations.

PDL BioPharma, Inc. (NASDAQ: PDLI) finds itself in a very unusual value situation with a market cap of $1.1 billion.  At $9.20, it is in the mid-range of $5.20 to $12.70 over the last 52-weeks.  Analysts are mixed and an average price target is actually $8.50 to $8.75, so there is a battleground situation between bulls and bears here.   Estimates for 2009 are $1.21 EPS and for 2010 they are $1.33 EPS.  Revenue projections for 2009 and 2010 are $336.6 million and $364.7 million, respectively.  These numbers are above recent guidance as PDL guided 2009 revenues to $310 to $325 million, but that figure actually excluded MedImmune royalties.  The key issue here is caution on a patent dispute where some feel that AstraZeneca (NYSE: AZN) is going to claim its MedImmune license no longer needs to pay royalties or make payments at the same rates.  PDL has roughly $192.7 million in cash and short-term investments, but its other issue is that it carries $445 million in long-term debt.  It can service the debt, but this is reason two for a battleground stock in PDL.  The stock trades at just over 3-times forward revenues, and forward P/E ratios for 2009 and 2010 are 7.6 and 6.9.  Sounds dirt cheap, but there are these two big reasons… In early 2006 this was a $30 stock.

JON C. OGG
AUGUST 22, 2009

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