Time to Buy Biotech Stocks

Briton Ryle

Updated March 25, 2013

As if recent beginning-of-the-month key economic figures and reports haven’t been healthy enough for the overall U.S. economy, figures on its biotech and healthcare sectors are definitely passing their physicals with the doctor’s approval.

“Health-care (S5HLTH) stocks are leading gains in U.S. equities this year for the first time since 1998,” informs Bloomberg. “Drugmakers, health insurers and biotechnology companies in the Standard & Poor’s 500 Index have returned 12 percent in 2013, including reinvested dividends, the most among the 10 main groups. That’s the first time in 15 years that the industry has led over the first 79 days into a year.”

SP 500 Healthcare Index ChartSource: BigCharts.com

Over the past 12 months, the S&P’s Healthcare index has beaten the S&P 500 by more than twice the gains.

Just what has brought about these stellar returns to the healthcare sector? Bloomberg notes they come “as companies cut costs and investors speculate an expansion of insurance programs will benefit hospitals and insurers”.

Healthcare insurers, for their part, are benefitting with a little help from the U.S. government, as President Obama’s new healthcare law “may extend insurance over the next decade to about 27 million people who are currently uninsured”, Bloomberg calculates.

This federally funded assistance will enable more people to sign up for healthcare insurance, and insurance providers are looking forward to this steady stream of federal income.

For investors interested in hitching a wagon to the healthcare insurance sector’s wagon-train, U.S. News and World Report ranks the leading 25 American health insurance providers.

Patient DoctorBy far the largest health insurer is United Health Group (NYSE:UNH). A large-cap with a capitalization of over $55 billion, its earnings per share are projected to be $5.51 for 2013 and $5.97 for 2014. Although its growth estimates of 4.4% for 2013 and 8.3% for 2014 are expected to be below the S&P 500’s growth estimates of 8% and 12.9% for the same years, investors may find UNH’s lower price/earnings more attractive—9.88 for the insurance provider compared to 18.42 for the broader market. (Data source: Yahoo! Finance)

The cheaper price per share relative to future earnings seems to be poised to offset the slightly slower near-term growth estimates compared to the market as a whole. That is, until the new Federal healthcare insurance assistance provisions kick-in, which could lift all healthcare insurance provider stocks considerably.

On the drug makers’ side of the sector, “Most of the big drug companies have experienced patent cliffs and are now repositioning themselves for growth,” reports Bloomberg. “Companies in the industry … have cut jobs and sold off businesses to boost profits and fund share buybacks. U.S. regulators approved 39 new drugs last year, the most since 2000, data from Bloomberg Industries show.”

Cincinnati’s Fifth Third Asset Management portfolio manager Dan Popowics informs Bloomberg, “The industry is slimming down. You have a lot of large companies doing shareholder-friendly activities, and all are benefiting from new product flows.”

Figures compiled by Bloomberg show that the recent “rally has boosted valuations for health-care shares to the highest in five years, narrowing its discount relative to the S&P 500. The industry trades at 15.1 times earnings, compared with a multiple of 15.4 for the U.S. equity benchmark.”

“This is the moment of the sun for the industry,” proclaimed Dan Teed, president of Wedgewood Investors Inc. in Erie, Pennsylvania, in a Bloomberg interview. “We’re looking at increasing the base of the entire industry, not just a few companies.”

Seems like a very good time for healthcare companies to sell some stock and take advantage of these high valuations and the overall enthusiasm toward the sector. And this is precisely what two biotech companies in particular have recently done in issuing their IPO’s: Enanta Pharmaceuticals (NASDAQ: ENTA) and Tetraphase Pharmaceuticals (NASDAQ: TTPH), both from Watertown, Massachusetts.

“Enanta is best known for its development of hepatitis C drugs in collaboration with Novartis and AbbVie,” Xconomy.com introduces. “Enanta sold 4 million new shares to investors at $14 apiece, meaning it hauled in gross proceeds of $56 million of cash to support its drug development programs.”

Yahoo! Finance gives us some insight into the company’s activities:

“Enanta Pharmaceuticals, Inc., a biotechnology company, engages in the development of small molecule drugs for the infectious disease areas. Its product candidates include ABT-450, an inhibitor of NS3 protease that is in Phase III clinical trials for the treatment of hepatitis C virus (HCV) infection; EDP-239, an NS5A Inhibitor for HCV infection; EDP-546, a Cyclophilin inhibitor, which is in preclinical studies for HCV infection treatment; and Nucleotide Polymerase inhibitor for HCV infection. The company also develops EDP-788, an intravenous drug for the treatment of methicillin-resistant Staphylococcus aureus bacteria. It has collaboration and license agreements with Novartis Institutes for BioMedical Research, Inc. and Abbott Laboratories. The company was founded in 1995.”

Introducing us to the other biotech IPO this month, Xconomy.com reports:

“Tetraphase … is seeking to make its mark as an antibiotic developer. Tetraphase sold 10.7 million new shares of stock at $7 apiece, which allowed it to rake in $75 million in gross proceeds.”

“Tetraphase Pharmaceuticals, Inc., a clinical stage biopharmaceutical company,” outlines Yahoo! Finance, “engages in the development of various antibiotics for the treatment of serious and life-threatening multi-drug resistant infections through its chemistry technology. Its principal products include eravacycline, an intravenous and oral antibiotic that use as a empiric monotherapy has completed the Phase II clinical trials for the treatment of multi-drug resistant Gram-negative infections; and eravacycline oral formulation that is in Phase I clinical trials to treat complicated urinary tract infections in intravenous-to-oral step-down therapy. The company’s products that are under development comprise TP-834; and TP-271 that is in preclinical trials for the treatment of respiratory diseases caused by bacterial biothreat pathogens, as well as engages in the development of Pseudomonas/Gram-negative program. Tetraphase Pharmaceuticals, Inc. was founded in 2006.”

Remember recently how IPO’s were little more than an underwriter’s cash-grab? Too high priced initially (perhaps opportunistically miscalculated), only to have the stocks plummet over the first few days and weeks, leaving the first few public stock holders high and dry? (Facebook is one case in point.)

Well, that is not what happened here with these two biotechs, a sign that perhaps the industry has some very solid underlying growth potential after all.

In its first day trading, Tetraphase rose a penny, indicating its IPO was very fairly priced; no one screaming “rip-off” there. Meanwhile, Entana’s stock during its first day of trading rose $2.50, gaining nearly 20% of its value on that one day alone.

No, Doc, it does not hurt when I do this.

Joseph Cafariello


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