Douglas A. McIntyre

Amgen Inc. (NASDAQ: AMGN), Biogen Idec Inc. (NASDAQ: BIIB), Cephalon Inc. (NASDAQ: CEPH), Cubist Pharmaceuticals Inc. (NASDAQ: CBST), and PDL BioPharma, Inc. (NASDAQ: PDLI) all made the cut.  We initially wanted to look for market caps over $1 billion, but we set the bar at $500 million and tried to focus on companies with growth.  We included valuation data, performance, and some color on each name.  Some, but not all of these, are also in our upcoming biotech buyout targets for 2010.

Amgen Inc. (NASDAQ: AMGN) is one we have long noted during its waves of problems and as it was under future reimbursement pressure that may be more like an old fashioned drug company now as it has matured.  The company’s market cap is $56 billion, which is actually now the largest market cap since Genentech is now Roche.  Its stock trades at $55.48 and its 52-week trading range is $44.96 to $64.76. Because of the pressure and past issues, it trades at only about 11-times earnings for 2009 ($5.03 est.) and 2010 ($5.14 est.) both.  It also trades at under 4-times 2009 and 2010 revenue expectations and it sits with an arsenal of almost $14 billion in cash and equivalents, yet has over $10.5 billion in long-term debt.

Biogen Idec Inc. (NASDAQ: BIIB) is no stranger to issues… another activist was just out this week calling for more action and the company has not been able to get out from under the TYSABRI PML despite the notion that this is a very low risk.  At $46.38, its market cap is $13.4 billion and its 52-week trading range is $37.21 to $55.34.  Biogen has over $3.1 billion in cash if you include its short-term and long-term investments and it carries just under $1.1 billion in long-term debt.  Biogen also trades at 11.6-times the $3.99 EPS target for 2009 and only 10.5-times the $4.42 target for 2010; and Biogen trades at 3-times 2009 expected sales.  The risk is here is of course the TYSABRI risks.  You never know if they will have to pull it again.  This is an opinion rather than a formal target, but TYSABRI is good enough in treatments of MS that it could quite literally have two or three times the number of patients using it if the PML risk can either be quantified better or could be mitigated.  Another issue is that it is trying to acquire Facet Biotech Corporation (NASDAQ: FACT) as a diversification and added pipeline move.

Cephalon Inc. (NASDAQ: CEPH) is not without its disputes, but it still fits the screens.  At $59.61 it has a market cap of $4.45 billion and a 52-week range of $52.55 to $81.35.  Cephalon carries about $1.6 billion in cash if you include short-term and long-term investments.  Its $350+ million in long-term debt is sort of in the shadow of its shorter-term liabilities.  It trades at only 10-times 2009 estimates of $5.93 EPS and only 9.6-times the $6.17 estimate for 2010; and that is roughly 2-times expected revenues. The company recently settled a dispute over Fentora and it is giving Barr Pharmaceuticals Inc. (NYSE: BRL) a license to sell a generic version of its pain drug Fentora in 2018.  For whatever it is worth, there are many active call options at various strikes and expiration dates and that means some buyout speculation or at least speculation that this one will come back in favor.  Cephalon treats central nervous system, inflammatory disease, pain, and oncology.

Cubist Pharmaceuticals Inc. (NASDAQ: CBST) has been in the doghouse over earnings.  At $16.95 it has a $982 million market cap and its 52-week trading range is $13.81 to $28.74. It trades at a mere 12.75-times 2009 estimates of $1.33 EPS and 11-times the $1.54 estimate for 2010.  It has over $500 million in cash if you count its short-term and long-term estimates and carries about $242 million in long-term debt. In its most recent quarter report the company lowered its Cubicin projections for 2009 at $520 to $525 million, under a prior $520 to $540 million range.  But its last quarter was ahead of estimates.  That puts this one under 2-times projected revenues.  Cubist has only Cubicin on the market as its standalone product and has a MERREM partnership with AstraZeneca and a pipeline with Alnylam Pharmaceuticals, Inc. (NASDAQ: ALNM).  While there is some competition from other drugs, this is supposed to be the best MRSA (methicillin-resistant Staphylococcus aureus) on the market.  Frankly, this is a company that we thought could be an acquisition target.  That being said, there had been some options speculation in the last two weeks but in the November contracts that expired Friday.

PDL BioPharma, Inc. (NASDAQ: PDLI) is technically out of the $1 billion market club as its $7.90 price has a market cap of roughly $945.4 million and its 52-week range is $5.20 to $9.92. It trades at only 6.75-times the $1.17 estimate for 2009 and about 6.3-times the $1.24 estimate for 2010.  The problem is that the convertible shares make the numbers misleading here and the company announced another special dividend earlier this month that it will pay a $200 million special dividend to stockholders, with part of the proceeds from the $300 million securitization transaction completed on November 2, 2009. All stockholders owning shares of PDL on December 1, 2009 will be paid a special dividend on December 15, 2009.  PDL has a significant amount of convertible securities outstanding and the remaining net proceeds of $85 million will be used for working capital and other corporate purposes.  PDL pioneered the humanization of monoclonal antibodies and receives patent royalties on sales for multiple humanized antibody products.  The company has further noted that it may receive royalty payments on additional humanized antibody products launched before the late 2014 patent expiration date.  So now you know why the screen is there: many investors may not know what its long-terms plans are.   All this makes PDL a bit of a wild card rather than an outright value stock.

Stay tuned for our biotech buyout targets for 2010 coming soon.

• The Hope for a BioHealth/BioTech IPO Pipeline (OMER, CPIX, TLCR, EBS, AGAM)
• More Biotech/Drug Mergers Coming? (SEPR, CBST, ONXX, GERN, VNDA, REGN, SGEN, ALNY)

JON C. OGG
NOVEMBER 21, 2009

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

But can the broad group continue to push higher in the face of new proposed legislation that threatens to choke profits for managed care providers and many other groups within healthcare?

The list of biotech stocks pushing to their highest levels since at least the same time a year earlier is impressive It includes Allscripts -Misys Healthcare Solution (Nasdaq: MDRX), ArQule Inc (Nasdaq: ARQL) BioScrip Inc. (Nasdaq: BIOS), Ista Pharmaceuticals Inc. (Nasdaq: ISTA), Noven Pharmaceuticals Inc. (Nasdaq: NOVN), and Watson Pharmaceuticals Inc. (NYSE: WPI).

With the exception of select financials that benefit from easy year-ago comparisons, biotech is the fastest-growing industry group. Projected earnings among profitable companies such as Celgene Corp (Nasdaq: CELG), Gilead Sciences Inc. (Nasdaq: GILD), Cephalon Inc. (Nasdaq: CEPH), Biogen Idec Inc. (Nasdaq: BIIB), Genzyme Corp (Nasdaq: GENZ) and Amgen Inc. (Nasdaq: AMGN) in aggregate are expected to rise about 10% in the next 12 months.

Many traders are looking at money-losing, high-beta biotechs, as well, that may show potential to become profitable in the coming years. Now that risk measures including the VIX and T/ED spreads have come down drastically from last year’s peaks, many are hoping to catch the next Genzyme or Celgene early.

Are traders simply paying too much?

Not necessarily. A relative comparison of biotech to other industry groups shows that despite a strong run the group still stacks up favorably based on relative valuation and growth rates. Traders are now paying a multiple of about 13.5x forward earnings for profitable biotechs, which is in line with the multiple of the S&P 500 as a whole.

The difference is that S&P 500 earnings are projected to increase only about 6% over the next 12 months, and many traders are seeking faster growth. 

Catalysts for the biotech industry include potential legislation that may make it easier for companies to produce generic drugs based on live cells, called biosimilars. Part of the Obama Administration’s agenda is to promote biosimilars to bring down drug prices. That may open up a large potential market for existing generic companies, as well as companies like AstraZeneca (NYSE: AZN).

Read related story on biosimilars.

And, the ever-increasing pressure for large drug companies like Pfizer Inc. (NYSE: PFE), Merck & Co. (MRK) and Eli Lilly & Co. (NYSE: LLY) to fill their pipelines with the next big blockbuster drug opens the door to potential acquisitions, especially given improvements in market liquidity levels. – Mike Tarsala

Earlier today, the company announced that patients treated with its compound to treat acute myelogenous leukemia (AML) did not show an increased benefit in overall survival. Treated patients had similar response rates vs. chemotherapy, but no increased survival benefit compared to chemotherapy alone.

The lesson here is that everything is relative to expectations in the world of equities. There’s only a small market share to treat that particular type of leukemia, so the company isn’t losing out on a whopping revenue opportunity. That’s evident, as the company reiterated its 2009 guidance today.

And the much larger opportunity is for the compound to treat myeloproliferative disorders, and the failure in AML doesn’t do anything to derail that.

Cephalon did $1.97 billion in revenue last year, is expected to show 10% growth still in the next two years, and it’s profitable.

Simply put, it’s a minor setback for a company that has other major opportunities.

– Mike Tarsala

Cephalon (NASDAQ: CEPH) is trading up slightly after Barron’s covered its promiosing pipleline.  With two new products on the market and one more in 2009, Barron’s thesis was that shares are not having the same problems as other bigger drug stocks and that shareholders should be sleeping easily here.  Shares are only up 0.5% at $77.37, but it is a larger company with a market cap of more than $5 Billion.

Auxilium Pharmaceuticals (NASDAQ: AUXL) is seeing a sharp 5% gain today after Barron’s talked up its Testin product, a testosterone gel used by men to live more energetic lives.  Barron’s noted that the Xiaflex drug for a hand treatment in the hundreds of thousands could have blockbuster status by 2011 after launching in 2009.

Barron’s can definitely make your biotech or drug stock rise when they cover it.  But remember that the axe swings both ways.  Back on July 28, 2008, shares of Intuitive Surgical (NASDAQ: ISRG) took almost a $14.00 haircut after the Barron’s cover story called the company overvalued.

Jon C. Ogg
August 11, 2008