Life (Science) Lessons: The Hows And Whos To Play Biotech

Biotech is booming.

After particularly rough endings to 2015 and 2016, iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB) has had “a rockstar of a year,” and the last two weeks, in particular, have seen significant inflows — about $400 million — into industry ETFs.

“I think with respect to the pharma and the biotech industry, the current status quo is a good place for being a drug executive, because you have continuing drivers of demographics, you have continuing solid pricing, you don’t have the fears of the industry pricing getting slashed, so I think people in our industry are breathing a sigh of relief,” Paul Yook, co-founder of LifeSci Index Partners, said on the Sept. 27 edition of Benzinga’s PreMarket Prep radio show.

Avoiding Pain

The favorable environment guarantees no success, though. Biotech stocks are notoriously capricious, as evident by last month’s unexpected sinkings of Axovant Sciences Ltd (NASDAQ:AXON) and Versartis Inc (NASDAQ:VSAR).

“If you try to pick an individual stock, sure you might be able to hit a home run, but you have the same propensity to get blown up,” Yook said.

He recommends a portfolio diverse in clinical trial stocks, such as his firm’s Virtus LifeSci Biotech Clinical Trials ETF (NYSE:BBC), which consists of 75 equally weighted companies and is up about 51 percent this year.

Biogen

While Yook foresees long-term profits in biotech, he considers the near term rife with challenges. One such risk is an enduring — albeit abated — attack on prices, which precipitated the halving of Biogen Inc (NASDAQ:BIIB) shares between 2015 and 2016.

Persistent price hikes had long driven revenue growth, with Biogen’s top-selling multiple sclerosis drug increasing from $10,000 in 1996 to $62,000 in 2014, but recent criticism of pricing models made it difficult to maintain that rate of inflation.

Fortunately, Biogen turned itself around with the spinoff of its hemophilia business, jettison of high-risk pipeline programs, and success in its Focal Muscular Atrophies treatment.

“They’ve got some real growth drivers,” Yook said. “For the first time in a while, I think, Biogen is a pretty good growth stock to own in the immediate term.”

Gilead

Meanwhile, an acquisition-centered strategy is expected to drive Gilead Sciences, Inc. (NASDAQ:GILD). The firm’s recent $12 billion buyout of Kite Pharma Inc (NASDAQ:KITE) was the largest of a pre-commercial company in history and transformed Gilead’s focus from HIV and Hepatitis C to the opportunity-teeming cancer space.

“This is going to be something that’s going to drive their value going forward,” Jonathan Wexler, chief sales officer at LifeSci Index Partners, told Benzinga. “They’re going to be able to compete with some of the larger pharma companies now and really transition their business into one that’s more holistic, so we’re very constructive on the company.”

In fact, Yook expects the Kite portfolio to help lift Gilead from a four-year nadir struck this summer and maintain the firm’s price/earnings multiples above a present 9.5 ratio.

Amgen

The level of diversification Gilead achieved through Kite also justifies Yook’s confidence in Amgen, Inc. (NASDAQ:AMGN). The “juggernaut” boasts a vast pipeline that protects it from over-exposure to a single indication.

“It’s really kind of an ETF of the biotech industry, I think,” Yook said. “We like it a lot.”

The markets like it, too. Amgen struck all-time highs last month and continues to trade close to its record.

Allergan

Meanwhile, traders are less enthused about Allergan plc Ordinary Shares (NYSE:AGN), which could suffer continued declines in the coming years due to its prioritization of acquisitions over product development.

“Their sales are going to probably not grow as much if they don’t continue to make acquisitions, and in this climate, it’s going to be difficult to do so,” Yook said.

Allergan’s risk is further augmented by its product portfolio. Its leading Botox is “very resilient, but it doesn’t have the same growth profile of some of the life-saving drugs that we see launching,” Wexler said.

Teva

A slowdown in patent expirations, which brought “huge cash windfalls” to the generic space, will soon compound the effects of debt already stunting the likes of Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA).

“You’re talking about Teva, $35 billion of debt,” Yook said. “They're trading at seven times debt-to-EBITDA. Five to seven times is just not sustainable when they're hiccupping in their core business.”

Valeant

Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has similar concerns.

“I think that their darkest days may very well be behind them, [but] I’m not sure that they’re in the clear at all,” he said. “They still have a crazy amount of debt. ... So even though they do have some great products, I think it’s kind of dead money.”

Valeant fell from $257 in 2015 to a present rate of $14.28, and by Yook’s analysis, the stock will never regain its highs.