The Sick Economist's Blog, page 15
June 15, 2020
HOW TO INVEST $1000 IN THE AGE OF COVID-19
By John Coughlin, Biotech Strategist
Before the time of the Coronavirus, Co-diagnostics specialized in the field of infectious diseases. Over the past year, Co-diagnostics have shifted their attention from creating tests for hepatitis B, hepatitis C, malaria, and other diseases to a full-blow effort into creating accurate test kits for the Coronavirus. Although they have shifted their efforts, Co-diagnostics is well-equipped to develop testing kits on a larger scale.
Why Co-diagnostics?
Co-diagnostics can be considered one of the biggest winners from the Coronavirus in terms of price-performance. Stepping back from the company’s stock price and more into the company’s performance, Co-diagnostics is an attractive buy. Essentially from the start of the year, Co-diagnostics has been a leader in the production and distribution of test kits across the United States and abroad. On May 1st, the company, backing its testing products, reported a “performance data demonstrating 100% sensitivity and 100% specificity.” This 100% accuracy of its test products showed the superiority of Co-diagnostics testing kits and has further brought in more government testing kit orders.
For biotech investors who do not want to chase story stocks, Co-diagnostics provides a haven for a conservative investor. Moderna and Novavax, who are actively in the process of finding a vaccination, create a space for highly speculative investors to inflate the price of a stock. Co-diagnostics, or CODX, is only focused on producing testing kits for the public, which will remain an essential activity. Looking at the stream of revenue the company has already received, the jump in stock price can be well justified.
Technicals
Looking at a technical view of Co-diagnostics, the stock has, from a price of 91¢, risen to a year high of $29.72, and now sits at the $15 range. This price increase represents a roughly +1600% move related exclusively to their testing kits. Although Co-diagnostics has risen to great heights, there still remains an opportunity for a biotech investor to buy this stock.
At the current price of $15, the stock sits nearly 50% off its peak price of $29.72. Looking at prior price movement, the stock peaked initially at a price of $21.72 before selling off to a price of $7. If this trend repeats, CODX, which finds its support within the $15 price range, and could break the $30 mark.
Financials
The move in the Co-diagnostic stock, CODX, can be well explained if one looks further into their quarterly report on May 14th. Looking at their assets from Q4 2019 and Q1 2020, the company has seen a move from $2 million to $20 million in assets. These newly acquired assets, such as expanding their productivity for creating test kits, can be justified for the nearly 1600% move. Looking further into their financials, the company is operating at a net loss for the quarter at $1 million, although down from a $1.3 million loss in Q4.
Although these financials show a positive direction, the company is set to have an even better Q2, as the Q1 data were taken from the end date of March. With this timespan kept in mind, the company may be able to turn a profit in the upcoming quarters and expand their productions, as seen in their Salt Lake City facility, and Cosara joint venture facility in India.
A look into the future
Testing for the Coronavirus has been an essential part of finding a vaccination and “flattening the curve.” In the future, testing for the virus will become more popular as states within the U.S. progress to different phases of reopening. Within their conference call on May 14th, Dwight Egan, Chief Executive Officer, stated that “The Logix Smart
COVID-19 test design and underlying technology has become an important part of the fight against the pandemic” and that “testing was the driver of company’s revenue in the first quarter.” This newly acquired revenue will not likely slow down, as Egan stated, “the need for testing on a mass scale continues to grow” and gave an example that “there are more than 76 million students that need to be in school this fall along with 157 million workers who need to be at work.” If even a percentage of these people need to be tested, the demand for test kits from Co-diagnostics will likely hit new highs, increasing revenue.
Looking forward, the future for Co-diagnostics remains bright and full of promising results. With an increasing demand for testing kits and a long timespan for a vaccination, Co-diagnostics should thrive in uncertainty.
All Data in this post taken from the Co-Diagnostics Q1, 2020, report.
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June 11, 2020
ALEXION…A RARE GEM FOR YOUR BIOTECH PORTFOLIO?
Biotech Analyst Lee Rivers has sorted through the coals to find a gem in the world of rare diseases….
Business Model
Alexion specializes in medications for rare, chronic diseases. Its primary revenue generators are Soliris, Strensiq, Ultomiris, and Kanuma. Soliris makes up approximately 70% of Alexion’s revenue. Soliris treats rare blood disorders paroxysmal nocturnal hemoglobinuria (PNH) and hemolytic-uremic syndrome (HUS). Both of these disorders reduce red blood cells and can cause pain, fatigue, and blood clots. HUS also frequently leads to kidney complications. Soliris treatments are necessary biweekly. By focusing on treatments for rare diseases, Alexion experiences relatively little competition, allowing it to maintain pricing power in a natural monopoly. Soliris treatments cost about $500,000.
Alexion also produces Strensiq, which treats a rare disorder known as hypophosphatasia. Hypophosphatasia prevents the body from processing calcium and phosphorus, affecting approximately 1 in 100,000 individuals. Alexion’s next medication, Kanuma, treats lysosomal acid lipase (LAP) deficiency, which limits the body’s ability to break down fats. LAP deficiency affects nearly 1 in 40,000 people. Lastly, Alexion produces Ultomiris, which is the next-generation treatment for PNH, HUS, and other diseases.
Alexion’s patent exclusivity for Soliris is uncertain, with a major patent possibly expiring in 2021. Consequently, Ultomiris is meant to replace Soliris, as it requires treatment every eight weeks instead of two, and is cheaper than Soliris. Alexion is in the process of transitioning its Soliris patients to Ultomiris and is already ahead of schedule in that regard.
Competition
As previously mentioned, Alexion benefits from limited competition as a result of its medications’ focus on rare diseases. However, Apellis Pharmaceuticals is one firm that is attempting to compete in this space. Apellis has produced a drug called Pegcetacoplan, which edged Soliris in a direct comparison trial. Apellis expects to receive results for its trials in the second half of 2020, making regulatory approval possible in 2021 or 2022 at the earliest. Nevertheless, Alexion has expected competition with Soliris, since the patent is near expiration. Thus, Alexion has been transitioning Soliris patients to Ultomiris proactively. It expects most of Soliris’s patients to transition to Ultomiris by the time pegcetacoplan becomes available, especially since Ultomiris has a couple of enhancements relative to Soliris.
Financials
In Q4 of 2018, Alexion reported revenue of $1.1 billion versus $1.4 billion in Q4 2019, a 23% increase. Revenue for 2019 increased to $5 billion from $4.1 billion the year prior, a 21% increase. Net income experienced even greater growth over the same periods. Q4 net income was -$45 million in 2018 and $899 million in 2019. Total net income increased from $77.6 million to $2.4 billion in 2019. This profitability is not new for Alexion, as net income has been significantly increasing since 2008, with some minor fluctuations in the trend. Alexion’s net income in 2008 was $33 million and increased to $399 million and $443 million in 2016 and 2017, respectively, before briefly declining to $78 million in 2018. The decline in 2018 was merely the result of an expense associated with the purchasing of in-process research and development assets that had no alternative uses at the time of the purchase, according to Alexion’s 2018 annual report.
Moreover, Alexion’s 2019 price-to-sales ratio (P/S) is 4.3, while the industry average is 7.5 The company’s price-to-earnings ratio (P/E) is 9.75, despite an average of 30 for a profitable biotechnology firm. Alexion also has traded at P/E ratios ranging from 15 to 290 over the period beginning 2010 to 2018, with an average P/E of about 40. These price ratios combined with the historical average of Alexion portray that it appears to be undervalued by the market relative to the average biotechnology firm.
Portola Pharmaceuticals Acquisition
Alexion has reached an agreement to acquire Portola Pharmaceuticals for $1.4 billion. Portola produces Andexxa, (marketed as Ondexxa in Europe) which stops life-threatening bleeding in patients that have received anti-coagulates (particularly the Factor Xa inhibitor). Of the patients that use Factor Xa inhibitors, approximately 5% of patients will experience serious bleeds that can only be staunched by Andexxa (or Ondexxa). Alexion sees opportunities for sales expansion of Andexxa, in addition to the present growth of the Factor Xa inhibitor market, which is expected to grow at 12.5% per annum over the next 10 years.
Despite Soliris and other Alexion products’ focus on chronic, rare diseases, Alexion believes its strong hospital networks and pervious commercial excellence with market access will allow it to enhance and broaden the number of patients that can be helped by Andexxa, despite its one-time, emergency usage that contrasts Soliris. By leveraging its established market access, commercial, and operations organizations Alexion wants to increase the scope of Andexxa. Furthermore, Alexion the purchase of Portola is meant to diversify Alexion’s business strategy since Soliris’s future exclusivity is in question.
Future Possibilities
Alexion is also expanding the uses for Soliris and Ultomiris. Both treatments are in multiple phase 3 trials, including additional trials for PNH and HUS, as well as neuromyelitis optica spectrum disorder (NMOSD), in which the immune system targets optic nerves in the central nervous system, as well as generalized myasthenia gravis (gMG), a life-threatening neuromuscular disease. NMOSD affects 10 in 100,000 people, while gMG affects 40 in 100,000 people. Soliris also is in pre-clinical trials to determine its effectiveness in aiding with coronavirus-induced pneumonia.
Moreover, there has been growing evidence that the cause for many COVID-19 related deaths is the emergence of blood clots that can be treated using anti-coagulates. Portola’s Andexxa is the only known treatment for the side-effects Factor Xa Inhibitor anti-coagulates. Of the patients that utilize Factor Xa inhibitors, the anti-coagulate previously mentioned that is growing in popularity, 5% will experience side-effects that will require Andexxa for treatment.
Taking a look at the possible revenue that Alexion could be able to receive from Andexxa, we assume that the drug would only be available to the OECD nations, Russia, and China because of its cost, making it available to a total of about 3 billion people. Assuming that the global COVID-19 hospitalization rate in one quarter is the same as that of the United States for simplicity (0.4%), there will be approximately 9 million coronavirus related hospitalizations in one quarter. Anti-coagulates will then be given to each as a preventative measure, with about 32.6% (and growing) of those anti-coagulates being Factor Xa inhibitors, thus giving a total of 2.93 million Factor Xa inhibitor doses, as a conservative estimate. Of these 2.93 million doses, 4%, or about 117,360 patients will have reactions in which Andexxa and Ondexxa are the only medications for treatment. Each dosage then costs around $11,000, resulting in a demand of $1 billion over the quarter, and with a 48% operating margin, Alexion stands to gain about $480 million in profits before taxes.
Using Alexion and Portola’s combined shares outstanding of 303 million, this would add about $1.60 to Alexion’s quarterly earnings per share (EPS), which is already currently around $2.50. Annual EPS would then increase to around $16.40, resulting in a possible share price above $150 if the P/E ratio remains just below 10, a gain of more than 30%. If the P/E ratio were to return to previous averages, however, a share price of $500 or greater would not be unreasonable. Despite being a strategic acquisition for diversification, Portola’s acquisition could lead to explosive growth for Alexion, well beyond investors’ largely mediocre future expectations.
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June 10, 2020
IS CATALYST PHARMACEUTICALS A BARGAIN STOCK THAT COULD SUPERCHARGE YOUR PORTFOLIO?
It has been a rocky past couple of months in the stock market to put things mildly; the S&P had its worst March drop since the Great Depression. Things have begun to look more positive as the market rallies around the influx of cash from the Fed, erasing many of the loses previously held. The S&P gained 27% from its low bottom in March; investors are in uncertain times as the market continues to increase simultaneously with unemployment.
While the market continues to be volatile as uncertainty resides in the air, there are still bargains in the Market waiting for savvy investors to pick up on. One of these extreme bargain stocks is Catalyst Pharmaceuticals (NASDAQ: CPRX). Biotech in general is a pretty safe sector to be investing in at the current time as people are not going to forgo their prescription medicine which makes this sector a necessity for any economy. Additionally, many biotech companies have been playing a critical role in helping slow the spread of COVID-19 by beginning to work and test vaccines and helping to accelerate these developments.
Catalyst Pharmaceuticals is a biopharmaceutical company that mainly focuses on developing and commercializing therapies for people with rare conditions such as chronic neuromuscular and neurological diseases in the United States. The company’s main drug named “Firdapse” is used to treat rare muscles diseases and has worked extremely well in the past. There has been some criticism in the past on why the drug costs $375,000, which has sparked controversy, but has had very little impact on its annual sales.
Like most of the market, this small cap rare disease drug maker has been slammed pretty hard recently for little to no good reason, making it an extreme bargain. Catalyst Pharmaceuticals is on pace to bring in $135-150 million in sales in 2020 and has already exceeded expectations by beating its Quarter 1, 2020 earnings. With a market cap of $458.13M and a share price of only $4.31 Catalyst Pharmaceuticals is extremely small in comparison to major players, giving it the potential to see rapid gains once the market gets back on track. Even though Catalyst Pharmaceuticals has a small market cap, it isn’t so small that the price can be manipulated by other firms, making it once again a suitable choice.
So just because it has a small market cap and an affordable share price, why should you buy it now? At it’s current market cap and share price, the stock is trading at only 2 times 2020 sales which is crazy considering the average for rare-disease companies is 15 times This means that Catalyst Pharmaceuticals is extremely undervalued. Additionally, with a P/E ratio of 11x this resembles more of an established Big Pharma company, such as Pfizer, and not the small cap-company that it is. The industry average P/E ratio for profitable biotech companies is around 25-40 times their earnings which also shows that Catalyst Pharmaceuticals is an extremely undervalued company and will eventually shoot back upwards where it belongs.
Besides Catalyst Pharmaceuticals’ P/E ratio, they have very healthy financials, show strong growth potential, and high overall quality.
Growth Stability:
This is an important assessment in today’s times; we as investors want to make sure that we are putting our hard-earned money into a company that has the potential for stable growth, especially with the volatile markets. With 3,000 people living with LEMS in the U.S, Catalyst is looking to increase the use of Firdapse through its sales efforts and distribution program. Additionally, one upcoming event is a phase 3 trial of Firdapse which, if successful, will expand Firdapse’s use in the near future. Also, Catalyst Pharmaceuticals is waiting on a decision to be able to use Firdapses on patients in Canada which will allow them to expand their user base and increase profits. Also, Catalyst Pharmaceuticals’ Operating Cash Flow Stability, which compares the company’s operating cash flow to its market value, is very healthy at 1.27. This measure is way higher than the sector average of 0.19, showing high financial stability.
Quality:
Looking at Catalyst Pharmaceuticals right now, they are in very good financial health as their assets exceed their liabilities and will have the cash flow to be able to operate for the next year. Additionally, Catalyst Pharmaceuticals has a very strong EBITDA Margin of 36.6% which is their earnings before interest, tax, depreciation and amortization. This is very high especially considering the current industry average is -172.02%. Another extremely important factor to look at is the return on investment (ROI) of a company. Normally, the higher an ROI, the better, as it demonstrates that the company is being effective with investors’ money. Catalyst Pharmaceuticals has an absurd ROI of 50%, showing that their management knows what they are doing and are highly effective with their money.
High Risk Equals High Reward:
Catalyst Pharmaceuticals looks like an outstanding buy in the current market conditions that could offer a sizable return in the future. While Catalyst Pharmaceuticals does have healthy financials there could be upcoming issues such as legal and regulatory problems that could delay an increase in price or even lower it. Additionally, we are in unprecedented times and this current pandemic could delay or even forgo some of Catalyst’s clinical trials, causing a decrease in profit margins. While no one knows where the market will go in the short run, Catalyst Pharmaceuticals’ long-run prospects make the name a great buy for anyone’s current portfolio.
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June 9, 2020
CRUISE INTO SUMMER 2020 WITH THIS HOT BIOTECH STOCK
By Matthew Rojas, Financial Analyst
Currently, Galápagos is investigating several diseases in Phase I, II, and III clinical trials; not to mention, they have over 20 discovery programs dedicated to finding proteins that cause diseases and their subsequent inhibitors. Galápagos has several strategic partnerships with other biotechnology companies including Novartis, Servier, and, most notably, Gilead Sciences. The Summer of 2020 is an exciting time for both Galápagos and Gilead as their potential blockbuster inhibitor, filgotinib, recently tested positive for moderate to severely active ulcerative colitis in their Phase IIb/III clinical trial.
Filgotinib:
Filgotinib is a JAK1 inhibitor designed to treat ulcerative colitis, Crohn’s disease, rheumatoid arthritis, and other inflammatory diseases. JAK1 inhibitors are new mechanisms of action that are attractive to less severe patient populations because they are oral medications. Additionally, ulcerative colitis, for example, is a heterogeneous disease that requires many mechanisms of action to serve the entire patient population. Therefore, filgotinib is a revolutionary invention that has the potential to help patients who have not had success with other drugs. According to Phil Nadeau, Wall Street Analyst at Cowen and Co., there is a “market opportunity of over $4 billion for the 90,000 US [ulcerative colitis] patients who fail conventional therapy”. As of May 20, 2020, the 200 mg dose of filgotinib has tested positive for moderate to severely active ulcerative colitis. More importantly, the drug may have avoided the potentially fatal venous thrombosis black box warning, which other JAK1 inhibitors, such as Abbvie’s RINVOQ and Pfizer’s Xeljanz, have failed to do.
Additionally, on June 4, 2020, Galápagos and Gilead released their week 52 results from their Phase III clinical trial for filgotinib in adults with moderate to severely active rheumatoid arthritis. According to the study, “The data demonstrate sustained efficacy and a consistent safety profile with up to 52 weeks of filgotinib across RA patient populations”. Because filgotinib appears to be both effective and safer for ulcerative colitis and rheumatoid arthritis patients, this drug represents a perfect opportunity for people to invest in Galápagos.
The Numbers (in thousands of € ):
Galápagos has strong financials and statistics, allowing it to operate productively even during the current pandemic. According to its 2020 first-quarter balance sheet, Galápagos has €2,743,573 in cash and cash equivalents, a 124% increase compared to its first-quarter in 2019. Many companies are currently in a liquidity crunch due to COVID-19, whereas Galápagos has ample cash to continue operations. Furthermore, Galápagos’ current ratio is a staggering 9.28, meaning that it can easily cover its short-term debt obligations. They also have an ideal debt-to-equity ratio of 1.1, indicating a small amount of risk because the company is growing steadily without taking on a serious amount of debt.
Moving to the first-quarter income statement, Galápagos is currently operating at a loss of €50,601; however, it is important to keep in mind that this is not necessarily a bad thing. During the first quarter of 2020, the company invested €116,763 in R&D, and during the year of 2019, they invested €427,320 in R&D. Galápagos is a growing company that is using its earnings to reinvest in initiatives that will likely payout in the future. Beyond filgotinib, Galápagos has other molecules in mid to late stages of clinical trials such as GLPG1960 for idiopathic pulmonary fibrosis and GLPG1972 for osteoarthritis.
According to its most recent statement of cash flows, Galápagos burned just €83,398 in cash and ended the first quarter with a net increase of €864,965 in cash and cash equivalents. The company is clearly generating more than enough cash to keep up with its quarterly expenditures. Overall, Galápagos has stellar financials across all three statements, making them an excellent company to invest in.
The Stock:
At its peak this past February, Galápagos was trading at $274.03, whereas now the share price has decreased by about 27% to approximately $200. This decrease in share price is likely because Galápagos has no initiatives specifically dedicated to COVID-19, so it is not at the forefront of many investors’ minds. However, with the myriad of molecules that Galálagos has in its clinical pipeline and with the recent success of filgotinib, this lower stock price represents a great opportunity for people to buy low and sell high once the market inevitably recovers.
At the end of 2019, Galápagos had a P/E ratio of 37.76, which was right in the range of other successful biotechnology companies. For example, Abbvie and Gilead Sciences had P/E ratios of 39 and 30.65 at the end of 2019, respectively. However, Galápagos now has a P/E ratio of 70.13, indicating that for every dollar invested, investors are profiting less than they would have last December. Nevertheless, these sharp increases in P/E ratios are what many companies are seeing as they struggle to deliver as many profits to shareholders as they did before the pandemic. This ratio will likely decrease as the economy gradually resumes full-scale operations.
Currently, Galápagos’ earnings per share is -$1.69, signaling that investors are losing money — not to worry, though — this is common for biotechnology companies. Galápagos is investing heavily in R&D to push its molecules through clinical trials, and it has had a steady progression thus far. In the future, Galápagos will likely have more of its molecules approved by the FDA, and its earnings per share will increase.
Conclusion:
Even though Galápagos’ stock has suffered due to the current COVID-19 crisis, the company has a multitude of strong selling points: they have a large and diversified clinical pipeline, filgotinib recently tested positive in the Phase IIb/III clinical trial, and the company has sufficient liquidity to carry on and recover its first-quarter losses. Overall, Galápagos has significant potential, and now is the perfect time to invest while many people are focused on stocks related to COVID-19. This summer, get on the Galápagos boat — I promise you won’t regret it.
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June 7, 2020
GILEAD SCIENCES INC: ONE SIZZLING STOCK FOR THE SUMMER
This is a Guest Post by By Michael A. Mannen, Financial Journalist
In light of the Covid-19 epidemic, public markets around the world have been in turmoil. However, hopefully, this summer yields a more exciting outlook for the public markets. Covid-19 has left many investors scrambling to change their portfolios to cope with the epidemic. The ripple effect Covid-19 has had on the United States economy, however, has created opportunities in certain sectors. This summer can be bright for investors that have a strategy for investing during a crisis.
The Covid-19 recession exacerbated many of the underlying economic problems that the world economy was experiencing prior to the outbreak. For example, artificially low interest rates left many companies over leveraged and without adequate cash on their balance sheet. Similarly, since the 2008 financial crisis, public debt in developing countries has started to mirror corporate debt in the United States. Many companies cannot afford even the temporary loss in revenue caused by Covid-19. Likely, companies in the future will restructure their balance sheets to ensure that they can survive such a pandemic. Moreover, they are likely going to take extra actions to ensure the well-being of their company during another pandemic. This is especially true for international companies that dominate the S&P 500.
However, public healthcare companies have experienced relatively decent increases in their stock price since the Covid-19 outbreak. This is likely due to an increased demand for their services. In this time of crisis, healthcare stocks have become an area of interest for investors. Similarly, metals such as Gold and Silver have really skyrocketed with the recent market plunges. However, during the crisis cash remains the best investment for many investors. Among the healthcare stocks to watch this summer include Gilead ($GILD) . Large market cap healthcare companies like Gilead have performed exceptionally well during the Covid-19 crisis. They will be pivotal to the country’s recovery.
Despite Gilead’s steep five year decline in stock price, this year we have seen a resurgence. Gilead is up nearly 16% year-to-date and there has been a renewed interest in the stock. The Foster City biotech giant is a member of the S&P 500 and is a leader in RNA virus research. They were responsible for pioneering many of the modern HIV therapies that patients depend on today.
Heading into the Covid-19 crisis, Gilead had ample cash reserves and little long-term investments. Unlike most companies they have flexibility to pursue many risky projects. Currently, Gilead is in an arms race with other companies to develop Covid-19 treatments. It’s recent partnership with Roche has ushered in a promising new Phase 3 clinical trial that could mitigate some of the symptoms that Covid-19 patients experience. Considering the imperative need to remove restrictions for businesses, this could substantially increase sales for Gilead’s Remdesivir.
The Phase 3 Clinical Trial will test Covid-19 patients with a combination therapy that includes treatment of Remdesivir and Actemra. Actemera is a regularly prescribed drug to treat inflammation. A recent study published in the New England Journal of Medicine indicates that Covid-19 patients recover faster when treated with the drug. The study found that Covid-19 patients treated with Remdesivir recovered an average of 4 days faster. Combination therapies have been the norm in the treatment of HIV and other infectious diseases.There can be a multiplicative effect and benefit when you combine two therapies. Similar to Actemra, Remdesivir has been shown to improve Covid-19 patient recovery.
In the fight against Covid-19, Gilead is likely to be a winner in the healthcare space. It has the research infrastructure and partnerships necessary to be formidable in the development of Covid-19 therapies. Covid-19 aside, Gilead remains a solid healthcare company due to its fundamentals. In the past decade, Gilead has also seen a substantial decrease in its long-term debt. Gilead’s cash reserve and other short-term investments exceed its long-term liabilities.
However, maybe the biggest factor in evaluating any biotech company remains their drug pipeline. Beyond its financials, Gilead’s pipeline includes many Phase 3 drugs in the areas of fibrotic diseases, oncology, inflammatory disease, and viral treatments. This diverse portfolio will ensure that it has an increased revenue sales in the future. Moreover, in 2019 Gilead has nearly doubled its investment in Research and Development; this year’s budget is surprisingly larger than the National Cancer Institute. Most notably, Gilead’s march acquisition of Forty Seven, Inc gave it access to the promising Phase 3 cancer drug and antibody therapy called Magrolimab. This could likely be a blockbuster product and generate a sizable source of sales revenue for the company in the future.
Gilead has shown a willingness to tackle epidemics in a variety of ways. Outside the lab, Gilead’s community partnerships are impressive considering the international presence of the company. Many of these initiatives are dedicated to helping patients living with HIV.
Other analysts’ ratings on Gilead’s outlook vary considerably. Most notably, SunTrust’s recent upgrade of the stock marks a reversal of their recent rating of Gilead. This could signal a buying pattern among investors and increase volume in the stock. According to MarketWatch, most analysts recommend holding the stock and few recommend selling. For more conservative investors, cash remains a solid investment during any crisis or any turbulent market period.
However, if you are looking to jump into the market, Gilead remains a good place for investors to start buying this summer.
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May 27, 2020
3 IMPORTANT TIPS FOR BEGINNING BIOTECH INVESTORS
But how to capitalize on the hot trend without getting burned? Financial Guru Brandon Smith offers some solid tips to our readers…
Biotechnology companies and stocks have been around for decades now. They are a main driver in the innovation of the healthcare industry. We’ve seen companies like Amgen ($AMGN), AbbVie ($ABBV), and Gilead ($GILD) develop into industry leaders. The importance of having an in-depth understanding of this industry is due to the story stocks that come and go all the time. We need to locate solid financials to assess if the company can sustain as a biotech firm. Here are three tips to understanding these stocks better.
1. Focus on strong companies that make money, and are positioned to make more of it in the future.
The first place to look is at the market capitalization of the stock. Understand that market cap’s that are under $300 million have the ability for the stock price to be manipulated. Value plays in the biotechnology space would have market capitalizations north of $100 billion. If you chose to chase a smaller cap company then please be mindful of ability for firms to almost dictate the price movement. The larger the market cap of the stock, the better chance of sustainability as well as stability. These are companies like Pfizer ($PFE) which has over $205 billion in market cap.
The next step would be to seek companies that have a low, but positive Price to Earnings ratios. The price to earnings ratio is the current price of the security divided by its annual earnings from the last full year. Compare the stock you are interested in with the industry average to judge if it is cheap or expensive for the current market. From there, you can then build a five year range for the p/e. If it’s towards the low end of the spectrum, then it is undervalued; in correspondence, the high end of the spectrum would then indicate that the securities are relatively overvalued. It’s a necessity for companies to make money; without cashflow, the chance of survival dwindles.
Following up the P/E ratio you would want to then look into the quarter over quarter EPS (Earnings Per Share) growth. Strong Quarter over Quarter growth signifies the company’s capability of growth. Small firms should be growing almost exponentially considering they have the most potential if a drug or treatment is a big success. The bigger biotech firms who have already captured a large percent of the market share for their product may have lower numbers, but they should still be positive quarter over quarter and even year over year. The caveat to this is to factor in the black swan event that the COVID-19 economic shutdown created. Normally we don’t voluntarily elect to shift our unemployment to all-time highs by shutting down the economy, so with that, understand the distortions that almost every company must be facing and how that will effect earnings for the entire year and potentially beyond.
Running an Acid test with the Quick ratio enables you as an investor to see if the company were to face economic hardships whether or not they would have the assets to manage the problem effectively and remain in business. The quick ratio measures the current assets against the current liabilities, excluding all inventories. A quick ratio below 1 indicates that the company has more current liabilities than current assets. For example: If the quick ratio is .75 then for every 1 dollar of liabilities that the company has they only have .75 cents of assets. The key component to why it is that we use the quick ratio is that it excludes inventory. Biotech firms can sometimes be heavily inventory value-based. Most inventory is not able to be quickly converted to cash, so the need for non-inventory based assets is essential. This adds some cushion to the firm’s operations if a competitor enters the space. A company named Exelixis ($EXEL) boasts a quick ratio of 8.1. They make drugs which help cancer patients.
Moving to the aspect of debts, investors should only inquire in stocks that have a long term debt to equity ratio of less than one. This gives the investor a sense of how much debt in relation to equity is the company using to operate. Vertex Pharmaceuticals ($VRTX) is a $73 billion dollar market cap stock with a Long Term Debt to Equity of .08. Unless the company is sitting on an extremely large cash position, the need to maintain and shrink long term debt is important. It shows efficient management, and enables the company to pay less interest overtime. Great firms will operate in a zero long term debt setup.
Lastly, the biotech space is highly competitive, and that causes the need for companies in the space to have an economic moat to protect margins. The Return on Assets (ROA) of a company shows how profitable they are with the assets that they own. Strong companies will exhibit ROA of 10% or higher, which gives them a moat in the specific biotech or healthcare space that they operate in. Biogen ($BIIB) boasts a hefty 22% ROA.
2. Don’t chase story stocks.
The biotechnology space has been around for decades. Some of the giants today were started forty some-odd years ago, and they show how companies with lifesaving drugs or treatments can be very profitable. Consequently, the same can be said for just as many, if not more companies that said they would create lifesaving drugs or treatments- but never do. Interpret the news and findings from multiple angles and sources.
The big story in the early 2000’s and even today was ‘cancer cure’ stocks, involving companies working on the cure for cancer. While we have evolved biotechnology to better fight and even remove cancer, we have still yet to cure cancer. A lot of those companies from back then aren’t around today. Understand, this is just a word of caution because numerous companies have achieved making drugs that cure diseases or aliments. Tread lightly and do your research.
3. Understand the competition as well, and how the company is positioned.
Biotech stocks need to hold a majority of the market they attempt to operate in to maintain the margins that they produce. You as an investor must analyze the scope of the competition in the marketplace. These are companies like AbbVie ($ABBV) and Amgen ($AMGN). These are companies with ~$160 billion and ~$130 billion dollar market caps, respectively. This gives them the ability to develop strong sales accounts which also enables them to buy other companies outright if the opportunity arises.
Learn More About The Author, Brandon Smith (@BSmithTrades), at launchpadyourlife.com or on Instagram & Twitter at @LPFinancials
The post 3 IMPORTANT TIPS FOR BEGINNING BIOTECH INVESTORS appeared first on Sick Economics.
May 18, 2020
UPDATED: OUR #1 BIOTECH STOCK FOR 2020
In December, 2019 we published our “Sick Pick” for 2020. This was a biotech demonstrating outstanding clinical promise, while still available for purchase at a modest price. We chose $SAGE based on the strength of it’s blossoming depression franchise. At the time, the share price had fallen precipitously related to a clinical setback,a setback that we thought was merely a misunderstanding on the part of the Market. Thus, we saw value.
The Covid-19 crisis has not been kind to Sage. The fledgling depression buster has seen it’s share price drop an additional 40% as the Coronavirus pandemic has forced a substantial salesforce layoff.
Does this mean that $SAGE is just another victim of the pandemic, to be sold at a loss? Does this mean that our original investment thesis was wrong to begin with?
Let’s take a look.
What Went Wrong?
On April 7th, 2020, Sage announced a dramatic corporate restructuring in response to the Covid-19 crisis. They were “pulling the plug” on their entire commercial operation related to Zulresso, dismissing approximately half of their entire staff, all at once. This kind of amputation by chainsaw is never a pleasant surprise for anyone, least of all shareholders.
As we noted in our original analysis of the company, Zulresso meets an important need in the market (postpartum depression) but is very resource intensive to administer. Far from a simple pill, Zulresso was actually a process. In the best of times this meant substantial investment of time and money for both the company and clinicians.
But April of 2020 was far from the best of times. In fact, almost no one could ever have predicted that most OBGYN offices and Psychiatrist offices would be shut down for a prolonged, or even indefinite, period of time. This lack of physical contact made it almost impossible to administer the drug (an infusion given in a controlled medical office) and certainly impossible to continue actively growing the necessary infrastructure.
The result was massive cash burn, with barely a glimmer of light at the end of a long tunnel. While Zulresso still had long term potential, Sage had a variety of other more important agents that also needed investment to progress to commercialization. Cash spent on promotion of the slow growing Zulresso could starve other programs of much needed investment. Faced with a “worst case” scenario, the captains of Sage’s ship did the one thing they could do to keep their ship afloat in the storm: they threw the dead weight overboard.
Now What?
With the money losing Zulresso amputated, Sage stopped the bleeding almost immediately. Management estimates that the cost reductions will conserve about $150 million in cash annually. This cost reduction left Sage with $870 million in cash at the end of March, 2020 and $0 in debt.
Faced with this kind of violent cost reduction and a plummeting share price, many investors flee. But we actually still like the company’s long term prospects. The company is still rapidly developing intellectual property targeting huge unmet medical needs. In addition to continuing to advance it’s flagship depression product (Zuranolone), the company has made substantial progress in advancing a molecule to treat essential tremor. More than six million Americans suffer from essential tremor, with few efficacious treatments currently available. As of today, the company could continue to advance these programs through 2022 without raising a dime in additional capital. The company currently has a market value of $1.9 Billion. Success with just one major new neurological agent, launched in a medical community thirsty for new brain treatments, could easily bring in $1.9 billion in revenue PER YEAR. We believe that Sage’s management has made some tough choices to survive the Covid-19 crisis and thrive in the not too distant future. Sage lost a hard fought battle, but can still win the war.
Original Post From December 2019:
It takes more than just a strong clinical program for a biotech to become a Sick Pick. Our investment dollars are devoted to biotech companies with nice pipelines, at the nice price. Going into 2020, with think Sage Therapeutics is ready to make us some healthy profits…
The last decade has been a miraculous time for both biotech investors and patients. The Biotech Industry of America has cured Hepatitis C, spawned novel treatments for heart disease, and taken its first few steps to cure genetic disease. Along the way, the IBB index, representing a basket of widely held biotech stocks, returned 342% in just ten years.
All of this success has left today’s biotech investor with two problems. First, biotech has done so well cranking out treatments, that many common disease spaces are now, “crowded.” With many treatments available for, say..high cholesterol, the bar set for new therapies is quite high. Second, many biotech firms with nascent franchises and obviously promising research are trading at record high share prices. The best innovation in the world won’t pan out for an investor who pays too much for that innovation.
So the clever investor would need to find a company with novel molecules in a field of medicine that still has great unmet need; additionally the company would have to be overlooked or misunderstood, so that our clever investor could snap up shares on the cheap. Not an easy gem to find amongst the coals!
For 2020, our pick is SAGE THERAPEUTICS ($SAGE).
The Clinical Space
For starters, Sage is authoring promising research in a clinical field that desperately needs new advances. Sage specializes in the human brain. Until now, clinical advances have been modest at best; any company that can successfully address Depression, Parkinson’s, or other neurodegenerative diseases won’t have much competition.
Specifically, Sage’s most advanced molecules are in the Depression category. Anyone who has seen a loved one attempt to navigate the maze that is Major Depression knows that our current clinical situation leaves much to be desired. The primary drug class used to treat depression today is the SSRI. Although there are dozens of different kinds of SSRIs on the market, they all share two major defects.
First, SSRIs take at least three weeks to kick in, sometimes much longer. Second, research consistently shows that SSRI’s just don’t work for everyone. According to the Harvard Medical School, 30% of depression patients never find relief from SSRI based treatments. Even for the 70% of patients who do achieve remission with current medication, it can be an agonizing “trial and error” process that takes many months, if not years.
Into this weak clinical environment charges Sage Therapeutics, introducing a host of novel molecules that aim to treat depression with an entirely new method of action. The hallmark of Sage’s drug candidates is speed …Sage’s drug candidates work in three days instead of three weeks. For some deeply depressed and frustrated patients, this could literally mean the difference between life and death….
The Molecules
Sage’s two most advanced candidates are Zulresso and SAGE 217. Zulresso was actually recently approved by the FDA for the specific treatment of PostPartum Depression, while SAGE 217 is in advanced, phase 3 trials for general depression. Both of these molecules function in the brain through modulation of the GABA and NMDA receptors, a previously unexplored approach to psychiatry.
Both treatments have been shown to provide almost immediate relief to a cross section of depressed patients. This is a big deal for a number of reasons. First, rapid efficacy greatly reduces the risk of patient self harm. Many patients decide that they just can’t wait three or four weeks for SSRIs to kick in, and hurt themselves in the meantime. Second, given that many patients need to try multiple SSRIs before they find relief, SAGE 217 could act as a “bridge” that keeps people hanging on until they finally find the right SSRI.
It might surprise you, but Major Depression is actually the leading cause for disability worldwide. Any drug that provides a new path to remission would have mind boggling commercial potential.
The Challenge is the Opportunity, Part 1
Sage has faced two headwinds that have created a mismatch between the stock price and the potential.
The first headwind has been the slow commercial start for Zulresso. Even with millions upon millions of American women suffering from PostPartum Depression, Sage sold just $1.5 million worth of the stuff in the third quarter of this year. In pharma terms, that is a rounding error.
But these figures could well be misleading. Zulresso is an injection with just enough demonstrated side effects to complicate administration. In clinical studies, a small but meaningful percentage of women became drowsy or sedated for sixty minutes following the injection of the drug. The sedation effect has been temporary and minor, but just enough such that Zulresso must be administered in a clinical setting under the supervision of clinical personnel.
This safety requirement has meant that Sage has had to invest time and money into building a clinical infrastructure to support Zulresso’s growth. Interested medical practices must become certified in the medication; certain protocols must be learned and followed to receive certification. Additionally, Zulresso is a “buy and bill” product, meaning that medical practices must buy the product up front, and then bill the insurance company after its administration. While this is a common business model across the medical spectrum, it would be a new way of doing business for most OBGYN and Psychiatry practices. Sage has made steady progress in “priming the pump” to enable more doctors to prescribe Zulresso, but gaining momentum with this drug is not an overnight process.
That being said, there are actually two great opportunities associated with these temporary barriers. First, for the practices that do invest the time and effort to become Zulresso certified, this means that they are firmly committed to using the product. Practitioners must devote resources upfront to gain the capacity to prescribe the medicine; this means that, once they clear the initial bar of certification, they will be committed to writing this drug.
The second opportunity is more psychological. One thing regarding psychiatric drugs that would surprise most casual observers is how well the placebo (fake) drugs do in clinical trials. In order for a psychiatric drug to be approved, the molecule must consistently perform better than a placebo. However, you might be amazed at how many people are “cured” by placebo drugs.
The fact that Zulresso is not just a simple pill, while a big challenge at first, could actually make the whole process more effective in the long run. While the new drug has been proven to be better than placebo, the extensive attention that patients will be receiving in a clinical setting will probably add a powerful psychological boost to women in need of a postpartum cure. Zulresso isn’t just a pill; it’s a process. That process could be very healing for many patients.
The Challenge is the Opportunity, Part 2
The second opportunity has come about in much more dramatic fashion. The recent “failure” of Sage 217 in a phase III trial opens up a huge opportunity for the astute biotech investor.
Sage 217 is a simple pill aimed at the entire spectrum of patients suffering from Major Depression. As such, this molecule has been a Wall Street darling, because it is aimed at a much broader potential population than Zulresso.
Throughout a series of ever more advanced studies released over the years, Sage 217 has demonstrated very rapid onset, providing significantly more relief to patients than placebo. These benefits typically reached full efficacy in just three days, and lasted longer than 15 days.
A new phase III study, the MOUNTAIN STUDY, was supposed to be the cherry on top, the largest study yet to confirm the powerful and durable efficacy of Sage 217.
But the results surprised many, leading to a surge of disappointment amongst analysts. While the drug demonstrate the same rapid onset and powerful efficacy it has become known for, the clinical benefits did not last the full 15 days. Sage 217 demonstrated statistically significant benefit over placebo for days 3, 8, and 12. But the effect had petered out by day 15.
The result was a massive, and instant crash in share price. The stock dropped by about 50%. Almost $4,000,000,000 of shareholder value vaporized instantly.
Is this a big enough clinical setback to justify such punishment from Wall Street? After many successful trials of Sage 217, is one disappointing trial enough to abandon ship?
The company maintains that the study results were flawed for two reasons. First, they claim that a significant portion of patients never took the medicine to begin with, thus they showed up the same as placebo (very depressed patients are notorious for noncompliance with all medication regimes). Second, they claim that this particular group of patients was not as depressed as the very sick subgroup of patients where Sage 217 has demonstrated rock star success in the past.
Are these arguments valid? Were there flaws in the design of the study that lead to outlier underperformance, or does Sage now belong in the “discount” bin?
The answer is: it doesn’t matter. Anyone who dwells on the debate around long term efficacy of the drug doesn’t understand anything about Major Depression. Most patients only arrive at a psychiatrist after a prolonged period of intense suffering. After suffering chronic depression for a long time, the patient typically has experienced an acute episode that has gotten so bad that someone in their life is now forcing them to take action. Such desperate and sick patients do not want to hear, “take this and maybe it will work in a month,” and physicians certainly hate to say that. Even if Sage 217 is proven to be merely a short term boost for desperate patients, the market could be huge. If you find someone drowning, the very first thing you do is to throw them a life vest to keep them afloat temporarily. You worry about fishing them out of the water after the situation has been stabilized.
The powerful short term effects of Sage 217 have been proven again and again in several well regarded clinical studies. The method of action is unlike anything else on the market. And now you can buy the company at half off. Now there is an opportunity that should cheer you up!
To top it all off, Sage is in a strong financial position with about $1 Billion in cash, and zero debt. The company also has a variety of earlier stage molecules for a potpourri of brain diseases …all of which suffer from large, unmet clinical needs. 2020 could be a breakout year as Sage rebounds from this December’s bad publicity hit. Why not go along for the ride?
DISCLOSURE: The Sick Economist owns stock in $SAGE
The post UPDATED: OUR #1 BIOTECH STOCK FOR 2020 appeared first on Sick Economics.
May 10, 2020
UNDERSTANDING FINANCIAL STATEMENTS DURING THE AGE OF THE CORONAVIRUS
This is a Guest Post by Howie Bick of TheAnalystHandbook.com
One of the best skills you can have as an investor, is the ability to analyze, and interpret company’s financial statements. Once you understand how to analyze and evaluate the information given, you’re able to get a glimpse into the way the business has been operating, and the current state of the company. It gives you a look inside the past results, past earnings, and past operational performance the company or business has experienced. It’s your way to judge or evaluate whether a company is performing well, poised for growth, headed for a decline, or in a tough financial position. There’s a lot of insight and information to be understood and had through analyzing the financial statements of a company or a business.
Every company and every business have an array of different financial metrics. A lot of it depends on the company, the business they’re in, and the industry they operate in. The three main financial statements are the income statement, the balance sheet, and the statement of cash flows. These types of financial statements are used by almost every company and are important to understand in order to get an idea of the company’s financial standing, and the company’s operational performance. We’re going to take a dive into trying to figure how to analyze a company’s balance sheet, get a feel for the type financial standing they have, and the way they run their business.
Interpreting the Numbers
To many people the balance sheet and income statement may just be an assortment or a collection of numbers. There’s a lot going on there, and much to understand. The financial statements of a company give a glimpse into the company’s past performance, and the way it’s been operating. Beginning with the balance sheet, it’ shows you the company’s assets. The asset section shows you what the company owns, possess, or is owed. You’re able to see the amount of cash it has on hand, the type of current assets (short term assets within one year), and the type of longer-term assets (real estate, machinery, etc) the company has. What you want to see is how much income the company is generating, which is one the income statement. To determine whether they’ll be able to maintain it, or grow it in the future. And if they aren’t able to, how much does it cost them to run their business? What are their costs to operate? How much of their costs are fixed versus variable? And how much runway (how long can they run or operate without investment or income) they have on hand, and how are they positioned to weather a storm. The company’s balance sheets that have minimal cash or cash like assets (short term investments, accounts receivables) on hand, are going to be heavily dependent on future income or revenue to continue operating their business and running their day to day operations.
Depending on the higher ups management style, if they are aggressive, looking to develop new products, services, or techniques will play a role in what their balance sheet says. Companies looking to grow their business, services, or offerings, or are looking to be aggressive in the marketplace, often spend lots of money on research and development, or in trying to build or develop something new that’s successful. They try to operate or run the company on a limited amount of cash, allowing them to grow and build new income streams. The less cash or cash like assets a company has on hand, will give you an idea of the way the company is currently being run and the type of financial standing a company is in. If a company has a strong balance sheet, it most likely means they are well equipped, with lots of cash, cash like assets, or limited debt or liabilities, ready to handle whatever comes their way. They could be more focused on running or operating the business, maintain or growing the number of sales from existing products or services, or waiting to develop or spend to create new income streams. Businesses must always be growing or innovating, but it’s important to grow and move at the right pace, given the company’s current standing.
Understanding What’s Ahead
In understanding where a company is headed, and the direction it’s going to go in, there are a variety of factors you have to consider and look out for. The industry or market the company operates in, the senior management and their management style, and any major or planned events, whether it be capital expenditures, lease expirations, or future growth plans, are all important in getting an idea of where the company is headed, and the direction it’s planning to go in.
The management of a company is important in the way it performs and the way it operates. A lot of the way a company runs is based on the vision of the senior level management, and the way they feel is the best way to move forward. Depending on the way they feel, the outlook they see, and the future they envision for the company, they’ll decide which ways to move forward, the path they see fit, and the objectives they’re looking to achieve.
One of the main elements of the way a company operates, is the way it utilizes or invests its resources. Meaning the capital, it has, the income it generates, and the assets they possess. The way a company uses its assets is one of the most important elements in determining the company’s future, and the path it’s going to take. The amount of capital a business has, whether it be in the form of assets or cash, determines the pace the company is able to grow and expand. Growing a business costs money. There are lots of expenses that come with growth. Increased inventory, increased marketing spends, and increased production. The more capital a business has, the faster it can grow. If a business is capital constrained, then it’ll have to grow at a slower pace.
It’s also important to get an idea of any major upcoming events within the company. Whether certain debt or notes are coming due. Any major leases expirations. Are there any major capital expenditures planned? A lot of these items are included within the summary, or in the footnotes in one of the documents. These events have the potential to incredibly effect the profitability of a company, the revenue it generates, or its market share within a given space. An important factor to consider in the biotech space, is when does the patent expire on certain drugs and medications. These patents provide companies with incredible head starts, enormous earning potential, and the ability to have a protected income stream for many years.
Conclusion
When you’re analyzing a company, an investment, or a stock, there are lots of factors to consider when trying to get a read, or a better understanding of the company, or the direction it’s headed in. Learning more about their balance sheet, getting a glimpse into the way they operate, and the current state of the company shows you the type of standing they’re in. By reading financial insights into a company, you’re able to get a sense of what they’re objectives are, the type of position they have in the marketplace, and the type of agenda they’re trying to achieve. By seeing the type of management, the decisions they’re making, and some of the major events ahead you’re able to get a glimpse into the direction the company is headed in. A lot of what financial analysts do, is to understand what a company is doing, why they’re doing it, and how it’s going to perform. You’re trying to be a financial analyst of your own, and try to determine whether the company, investment, or stock is going to perform well. Each company, each investment, each asset, and each business perform differently, and depends on a variety of different factors. We hope you were able to gain a bit of insight, and more of an understanding how to analyze a company’s financial statements, and some of the important things to consider.
Whether you are looking to break into Wall Street, or simply want to run your own investments like a pro, check out https://theanalysthandbook.com/ to take the next step in your financial career……
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April 19, 2020
ANALYST SEES OPPORTUNITIES AMIDST COVID-19 CRASH
This is a Guest Post by Howie Bick of TheAnalystHandbook.com
On the bright side, as things begin to become more positive, and the outlook seems to be more promising than a few weeks ago, what lies ahead for the market is an interesting topic to consider. As each day passes, and as the curve begins to flatten more and more, people have started to regain a sense of optimism and positivity that we’ll be able to move forward and back into normalcy sometime soon.
Earnings
The earnings of companies are going to be a bit difficult to predict, and much different from their prior quarterly’s earnings. Many companies have seen their income streams and revenue decline heavily, due to the recent pullback. Lots of companies are going to be reporting earnings that are percentages of what they once were. The industries most affected are going to see their revenues fall drastically, almost as if off a cliff.
Going forward, it’s going to be difficult to predict company’s earnings in Q2 of 2020, as we are unsure when the economy is going to open up, and when business and commerce will return to normal. Q3 seems like it is still available and as of now, still in play to be the time when the economy returns to life. Past that, it’s a bit difficult to predict, as the fallout is going to be tough to predict. Which companies will be affected, which industries are going to need bailouts, and what new tendencies are people going to embody?
Earnings are definitely going to be changing going forward, some companies will see their market shares back to where they were, while others will see theirs go into a declining trajectory.
Dividends
Dividends are going to be hard to come by as companies have seen their profits and earnings nosedive. It’s going to be difficult to imagine companies departing with cash and capital they’ve earned, to return it to their shareholders right now. Any cash or capital will probably be used to keep the business running, or to find more ways to increase their revenue. Some companies will use their capital to purchase distressed companies or other businesses they’ve had their eyes on at a discounted price.
It’s probably more valuable to both you and the company that the company retains any money its earmarked for any dividends, as it will give them increased liquidity and flexibility in a time where those are hard to come by. It might be best to forego dividends in order to receive more of a capital appreciation in the future.
Ultimately, each company is going to have to decide what to do with their dividends for their shareholders. It’s a good thing to keep an open mind, and consider that moving forward, it might be in both of your best interests to delay or suspend any current or scheduled dividends.
Mergers and Acquisitions
Incredibly interesting topic to talk about, as the M&A market is probably going to be very intriguing for some companies, and a nightmare for others. Depending on the company’s financial position, will have a big effect on the types of deals or transactions that are in the pipeline, or to be had. Companies that have capital, strong balance sheets, and are in good financial standings, will probably try to find ways to take advantage of the decline, by finding or scooping up companies at discounts to the values they were once at. It will probably be an interesting time to be in the M&A field during this time of economic uncertainty.
Buybacks
Buybacks have been an incredibly hot topic in recent days, most notably in regard to the companies who will receive federal bailouts. It’s interesting to imagine, any company would find more value in purchasing their own stock, rather than trying to use their liquidity or capital out in the marketplace. Companies are now in a position most likely, to find more value in other companies and businesses, rather than their own. As prices and valuations have come down, it’s become an incredibly attractive time to have available liquidity ready to deploy.
Volatility
Volatility has become somewhat of a norm in the days we find ourselves in. The market has seen incredible swings in the market, both up and down. Depending on the news, the state of the market, or the world response to the pandemic, has caused massive selloffs, and fast climbing days as well.
The volatility the markets experienced in March, were truly a rare occurrence. With days going from up 10%+ down 10%+, it was a time of heightened uncertainty. With questions surrounding every business, every market, and every company, the volatility was with good reason.
Going forward, the market will hopefully stabilize and regain a sense of normalcy. With bad days at roughly 3% declines, and good days at 2.5% increases, hopefully buyers and sellers will begin to get a better grasp of the economic impact of the virus, and the market will return to some stability.
Conclusion
As the world continues to move forward from the coronavirus pandemic, the market is going to be different than it was before. Companies’ earnings are going to be much different than previously predicted, as well as the future earnings a company may expect to generate. Going hand in hand with earnings, dividends are an interesting question to be answered by each company. Deciding whether to preserve and keep the precious amount of capital they do have, or to continue distributing dividends to their shareholders.
Building off capital, mergers and acquisitions is going to be quite an interesting dynamic in the near future, as companies’ valuations and prices have decreased, and select companies are ready to invest and take advantage of the discounted prices. What companies decide to do with the capital they possess, will be important in determining their financial future, and financial performance of the company’s in the future. In the time after all these decisions have been made, some companies will be better positioned than others. If you’ve ever wondered “what does a financial analyst do?“, they’ll be the ones evaluating the decisions each company made, and determining who is poised to come out of the coronavirus pandemic, stronger than they were before.
As more times continue to pass, we’re hoping the world begins to reshape itself into a state of normalcy, and a more familiar place than we’re living in. We’re hoping all the economic indicators and signals begin to take a more positive turn, so we can all move forward from this outbreak.
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April 13, 2020
ABBVIE: OUR TOP HEALTHCARE STOCK FOR INCOME INVESTORS DURING THE CORONAVIRUS SELLOFF
This is a Guest Post by Bob Ciura of SureDividend.com
In times of great uncertainty, investors should look to high-quality healthcare stocks for their steady cash flow and attractive dividends. Pharmaceutical giant AbbVie Inc. (ABBV) is our top-ranked healthcare dividend stock right now, due to its strong product line, future growth potential, and high dividend yield of 6.2%.
Plus, AbbVie is a dividend growth stock. The company has increased its dividend at a high rate since it was spun off from former parent company Abbott Laboratories (ABT). And, going back to its days as a subsidiary of Abbott, AbbVie qualifies on the list of Dividend Aristocrats. For all these reasons, AbbVie is an attractive healthcare dividend stock for dividend growth investors.
Is this sustainable?
The answer comes down to the following question, “What makes a good business in troubled times?” Ironically, some of the hallmark characteristics of biotech actually look quite promising during economic uncertainty. Let’s explore.
Business Overview and Recent Events
AbbVie is a pharmaceutical company focused on Immunology, Oncology, and Virology. AbbVie was spun off by Abbott Laboratories in 2013. The purpose of the spin-off was to give AbbVie its own dedicated management team and the financial resources to pursue its own independent growth objectives. The strategy has clearly worked to the benefit of the company and its shareholders. AbbVie generated adjusted net revenue of $18.8 billion in 2013—last year, revenue reached $35 billion, almost doubling in just six years.
AbbVie reported strong fourth-quarter and full-year earnings on February 7th, and results beat expectations on the top and bottom lines. Full-year revenue increased 3% on an adjusted basis. Excluding the impact of international Humira revenue, full-year adjusted net revenue grew 10%. Full-year U.S. Humira revenue increased 9% to $14.9 billion. However, internationally, where patent protections have begun to expire, Humira revenue fell 31% in 2019. Still, AbbVie had a very good year, with 13% growth in adjusted earnings-per-share for 2019.
AbbVie’s growth over the past several years was due to multi-purpose drug Humira, which has become the top-selling drug in the world. Humira now represents ~60% of AbbVie’s annual revenue, but this could be both a blessing and a curse. Humira has already lost patent exclusivity in Europe, and will lose patent exclusivity in the U.S. in 2023. Patent risk is a major risk factor for pharmaceutical companies, as billions of dollars in revenue can disappear once biosimilars hit the market.
Fortunately, AbbVie has invested heavily—both internally and through acquisitions—to build its pipeline of new products. Adjusted research and development expense totaled $5 billion in 2019, representing an increase of 76% since AbbVie became an independent company in 2103. This significant investment has given AbbVie multiple growth opportunities to replace Humira.
Attractive Future Growth Pipeline
We believe AbbVie will fare relatively well even in a recession, thanks to its strong product portfolio. AbbVie has a wide range of products that can offset continued declines for Humira. For example, Imbruvica sales increased 29% in 2019, while sales of Venclexta more than doubled last year. AbbVie saw 2019 revenue of $355 million and $47 million, respectively, for Skyrizi and Rinvoq, but expects combined sales in 2020 of $1.7 billion. In all, AbbVie has had 14 major approvals since 2013, spanning its core focus areas of immunology, oncology, neuroscience, virology, and women’s health products. The investments are paying off, as revenue from products launched since 2013 generated $9 billion in revenue in 2019.
Future growth will be driven by internal R&D investment as well as acquisitions. Last year, AbbVie announced the $63 billion acquisition of Allergan (AGN). This is a transformation deal for AbbVie, as it instantly broadens its product portfolio to give the company a leadership position in aesthetics, as well as neuroscience and women’s health products. The combined company is expected to generate annual revenue of nearly $50 billion. AbbVie expects the transaction to be 10% accretive to adjusted earnings-per-share over the first year, with peak accretion of greater than 20%.
AbbVie’s continued growth will allow the company to continue rewarding shareholders with a hefty dividend payout, along with regular dividend increases. We believe AbbVie’s growth should remain on track even in a recession, as pharmaceutical product demand tends to hold up during economic downturns. In many cases, consumers need to continue purchasing their necessary healthcare products, regardless of the condition of the economy.
Dividend Analysis
In addition to AbbVie’s strong business model and promising future growth prospects, its dividend is another attractive feature of the stock. AbbVie currently pays a quarterly dividend of $1.18 per share, equivalent to an annual dividend of $4.72 per share. The stock has a high dividend yield above 6%, which is extremely attractive considering the S&P 500 Index only yields 2.2% on average right now. And, with interest rates on the decline again due to the recent actions by the Federal Reserve to lower rates, income investors should view AbbVie as a favorable dividend stock by comparison.
Of course, sustainability of a company’s dividend payout is equally important as the yield itself. Especially in times of a market crash, investors need to be relatively certain that their dividend stocks will not reduce or eliminate their dividends. Multiple dividend suspensions have been announced by a number of companies in recent weeks, particularly in the hardest-hit industries such as restaurants, retail, and energy.
AbbVie appears to have a secure dividend payout. Using the company’s 2019 adjusted earnings-per-share of $8.94, AbbVie has a trailing dividend payout ratio of 53%. This is a fairly low payout ratio, which gives sufficient coverage to AbbVie’s dividend payout. There would need to be a massive hit to AbbVie’s earnings-per-share in order for the dividend to be in jeopardy.
AbbVie has increased its dividend each year since it became a publicly-traded company in 2013, and at a high rate of dividend growth. In 2013, AbbVie’s first quarterly dividend was paid at a rate of $0.40 per share. Since then, the company has grown the dividend steadily, to a rate of $1.18 per share as of the most recent quarter. AbbVie also qualifies as a Dividend Aristocrat, a group of just 64 stocks in the S&P 500 Index, with 25+ consecutive years of dividend increases.
Final Thoughts
The stock market crash over the past several weeks means income investors should position their portfolios defensively, with a focus on high-quality stocks that can continue to pay their dividends, even in a recession. Multiple stocks have suspended their dividends in recent weeks, with more likely to follow. The coronavirus lockdown means many industries are closed, with great uncertainty as to when the economy will recover. Instead of chasing the highest dividend yields, income investors should stick with high-quality healthcare dividend payers such as AbbVie.
The post ABBVIE: OUR TOP HEALTHCARE STOCK FOR INCOME INVESTORS DURING THE CORONAVIRUS SELLOFF appeared first on Sick Economics.
