You may have already been aware that the biotechnology sector has been hot over the past several years. But have you seen it lately? While most other sectors have been trending sideways, or even down as in the case of energy, the biotechnology sector has been absolutely on fire – with the largest biotech ETF iShares Nasdaq Biotechnology (NASDAQ: IBB) rising 54% in the last 10 months since April 11th, 2014.
In fact, the biotechnology space has outperformed every major sector as represented by the SPDR group of nine Select Sector ETFs graphed below.
Over the longer term dating back to the end of the last major stock market correction on October 1st, 2011, the biotechnology space has faired even better, holding the top spot among all sectors, rising 270% since then for an average gain of 79.02% annualized, as plotted below (beige).
Yet how does the biotech industry look going forward? Does it have the adrenaline to keep its momentum going? You can bet next year’s vacation money on it.
But when isolating which of the hundreds of companies in the field hold the greater promise, we’ll need to dig just a little deeper below the top layer. While the industry’s top two companies of Gilead Sciences Inc. (NASDAQ: GILD) and Amgen Inc. (NASDAQ: AMGN) are always good choices for investors with little time on their hands for research, there are at least three other companies directly behind these two industry giants who hold even better prospects.
Biotechnologies Top Five Specimens
Let’s get the two behemoths out of the way first, clearing away the top soil before getting to the richer deposits.
• Gilead Sciences, Inc., market cap of $154 billion, headquartered in Foster City, California, discovers, develops, and markets medicines for a variety of health conditions including human immunodeficiency virus (HIV), liver disease, pulmonary arterial hypertension, chronic angina, cystic fibrosis, influenza A and B, fungal infections, cytomegalovirus retinitis, and neovascular age-related macular degeneration.
• Amgen Inc., market cap of $118.6 billion, headquartered in Thousand Oaks, California, discovers, develops, manufactures, and delivers medicines for the treatment of conditions in the area of oncology, hematology, inflammation, bone health, nephrology, cardiovascular, and general medicine, which further include treatments for febrile neutropenia, rheumatoid arthritis, plaque psoriasis, psoriatic arthritis, anemia, osteoporosis, secondary hyperparathyroidism, ovarian cancer, heart failure and stable angina.
While these two companies are very popular among investors, posting very impressive gains since the 2011 correction which have reached 450% and 185% respectively while the S&P has gained 90%, investors will find the next three largest companies in the biotechnology industry even more promising going forward, they being:
• Celgene Corporation (NASDAQ: CELG), market cap of $96.17 billion, headquartered in Summit, New Jersey, discovers, develops, and commercializes therapies to treat cancer and immune-inflammatory related diseases including myeloma, leukemia, breast and lung cancers, pancreatic and gastric cancers, and lymphoma. The company is also engaged in drug discovery in collaboration with multiple other biotech companies.
• Biogen Idec Inc. (NASDAQ: BIIB), market cap of $95.42 billion, headquartered in Cambridge, Massachusetts, discovers, develops, manufactures, and markets therapies for the treatment of neurological, autoimmune, and hematologic disorders including multiple sclerosis, Crohn’s disease, hemophilia, non-Hodgkin’s lymphoma, muscular atrophy, optic neuritis, Alzheimer’s disease, and severe plaque psoriasis, with a number of new drugs in phase 3 and phase 2 clinical trials.
• Regeneron Pharmaceuticals, Inc. (NASDAQ: REGN), market cap of $43.46 billion, headquartered in Tarrytown, New York, discovers, invents, develops, manufactures, and commercializes medicines for neovascular age-related macular degeneration and macular edema, metastatic colorectal cancer, cryopyrin-associated periodic syndromes, with numerous products in clinical development for the treatment of DME and macular edema ophthalmologic diseases, oncology, rheumatoid arthritis and non-infectious uveitis, low-density lipoprotein cholesterol reduction, atopic dermatitis and nasal polyposis, and asthma. The company also collaborates with others biotechnology companies to discover, develop and market human monoclonal antibodies.
And now the moment of truth, plotting all five on a graph to compare their progress so far:
Over the past 3 years and 4.5 months since the last major correction of late 2011, the top performer has been smallest of the five by market cap, Regeneron, rising 660%, followed by the largest Gilead at 450%, then fourth largest Biogen rising 360%, followed by third largest Celgene which is up 300%, and lastly by the second largest Amgen with a rise of 185%.
The three underdogs have challenged the top dog in the industry Gilead, while already knocking the second dog Amgen out of contention. Yet over the short term the revenge of the underdogs has been made complete, as graphed below.
Over the past six months, industry leader Gilead has flatlined, while the number two Amgen has shown a little more life by rising 17%. Yet the three underdogs have beaten them both – with third largest Celgene leading the pack with gains of 30%, followed by the smallest Regeneron at 24%, with fourth largest Biogen sitting in third place at 19%.
Alright, so we can see that the smaller players can often mount incredible feats of might and speed as they burst up the charts in relatively quick order. But there is more to a stock’s investment worthiness than past performance. What about their current financial situations and future prospects? The underdogs have a lot of bite here too.
Present Financial Conditions
One of the most important financial stats to show a company’s ability to generate profit is its profit margin, which measures the percentage of revenues that the company is left with after covering all of its expenses. The higher the profit margin, the most profit the company is expected to make from its sales.
In order of best to worst profit margins we have:
• Gilead at 48.62% (largest market cap of the five)
• Biogen at 30.25% (fourth largest market cap)
• Celgene 26.07% (third largest market cap)
• Amgen 25.71% (second largest market cap)
• Regeneron 12.35% (fifth largest market cap)
OK, so here we have little surprises in the first and last place companies, which correspond to the largest and smallest of the five in their respective positions. But in the middle we have two of the three underdogs – Biogen and Celgene – overtaking the second largest Amgen with slightly better profit margins.
Next we have the companies’ return on equity, which shows how well management is at adding value to shareholders’ investments. In order of best to worst we have:
• Gilead at 87.25% (largest market cap of the five)
• Celgene 35.22% (third largest market cap)
• Biogen at 30.27% (fourth largest market cap)
• Amgen 21.55% (second largest market cap)
• Regeneron 15.49% (fifth largest market cap)
Here we again have Gilead on top and Regeneron at the bottom. But in the middle our two underdogs Celgene and Biogen have switched places, while still registering ahead of second largest Amgen.
One more figure from the present performance is the amount by which earnings have grown in the most recent quarter over the same quarter a year ago, or simply put, quarterly earnings growth. In order we have:
• Gilead at 340.60% (largest market cap of the five)
• Celgene 186.30% (third largest market cap)
• Biogen at 93.20% (fourth largest market cap)
• Amgen 26.70% (second largest market cap)
• Regeneron 13.80% (fifth largest market cap)
Again we have Gilead on top and Regeneron at the bottom, and again Celgene and Biogen have outperformed Amgen. But do you notice by how much? Celgene has outgrown Amgen by 6.9 times, while Biogen has outgrown it by 3.49 times.
We’re starting to form a pattern here, then, with the third and fourth largest biotechs vastly outperforming the second largest company in the space in both past performance and present conditions. But what about the future? Future earnings projections and growth estimates are arguably even more important in determining whether or not to buy.
Future Earnings Growth Potential
Let’s first focus on next year’s growth estimates:
• Celgene 30.60% (third largest market cap)
• Biogen at 17.40% (fourth largest market cap)
• Regeneron 13.90% (fifth largest market cap)
• Amgen 13.00% (second largest market cap)
• Gilead at 9.00% (largest market cap of the five)
Now this is what I have been talking about all along. The growth momentum going forward is clearly with the underdogs, as they are expected to grow their earnings by 13.90% to 30.60%, leaving the second largest Amgen in fourth place with 13% and the largest Gilead in last place at 9%. This explains why over the past six months Gilead’s stock has stagnated. Investors are aware that the company does not have very much growth momentum over the near term, and are favoring the underdogs more.
But what about the longer term, say over the next five years? Any change there? Slightly:
• Celgene 25.50% (third largest market cap)
• Gilead at 25.20% (largest market cap of the five)
• Regeneron 18.31% (fifth largest market cap)
• Biogen at 17.83% (fourth largest market cap)
• Amgen 11.10% (second largest market cap)
For their average annual growth over the next five years, the third largest Celgene still sits on top, but this time it is followed by the largest player Gilead, with the smallest Regeneron overtaking fourth largest Biogen, while the second largest Amgen again comes up last.
Adding all the stats together then, awarding 4 points for each 1st place finish down to 0 points for last place we have:
• Celgene scoring 16 points (third largest market cap)
• Gilead scoring 15 points (largest market cap of the five)
• Biogen scoring 11 points (fourth largest market cap)
• Amgen and Regeneron each scoring 4 points (second and fifth largest market caps)
There are dozens of variations of similar stock ranking systems available in technical trading manuals all over the web, such that we can customize our own ranking system based on the statistics that matter most to us.
But when constructing your own ranking methodology, remember that past performance, present conditions, and future expectations must all be considered together for a fair and balanced comparison.
And of course, as clearly illustrated in today’s exercise, be sure to dig a little deeper beneath the top soil of an industry to get to the gems buried below. In bull markets, it is often these underdogs that put forth the greater effort to claw their way to the top.
Among biotechnology’s largest 5 U.S.-based companies, then, third largest Celegene is gearing up to give top dog Gilead a fight to remember.