Tuesday, June 24, 2014

I Buy Regeneron; Comment on Vertex Pharmaceuticals

Regeneron Pharmaceuticals (REGN) has been down a bit lately, on talk of greater substitution of Avastin for Eylea, and today I finally dug into my cash and bought a tiny amount at $277.74 per share. Regeneron has a high P/E ratio, and all the dangers that implies. However, I think long-term prospects are quite good, and I don't think it likely I will be able to buy REGN much cheaper. If it goes down further, I may buy more.

Vertex Pharmaceuticals (VRTX) was the big winner today, up over 40% to end at $93.53. The news was that a new drug for cystic fibrosis had marginally positive results that may be good enough to get an FDA approval. I would not approve the drug based on the results if I sat on an FDA panel, but I don't. I also would not pay for such marginal benefits, especially given the price tags Vertex wants for its therapies. I think it is great they are working to help cystic fibrosis patients, but as an investor I am skeptical.

$118 million was how much revenue Vertex had in Q1. EPS was negative $1.00. Vertex might run up $500 million in sales this year, and probably at least that in losses.

So how do you justify a market capitalization of $22 billion with those numbers? By having the biggest Wall Street companies sing sweet songs about the future value of the pipeline.

Again, nothing against the company, and as long as the big boys can keep selling the stock to new fools, it might keep going up. But don't say I did not warn you about the danger. I believe in the power of therapeutic pipelines, that is why I bought Regeneron today and have owned BIIB, CELG, GILD and others for years. But I have seen big collapses when biotechnology pipelines did not deliver what sell-side brokers and analysts promised to gullible investors.

Another thing, how come Gilead (GILD) has been a sell according to many of the same people who are pushing Vertex? The story is Gilead's Hepatitis C drug is too expensive. But Gilead is selling a cure to a deadly disease for 85 thousand. Vertex, according to the new study, will be selling a drug that averages just 4% increase in lung volume (almost too low to detect) for over $100,000 per year. Why not worry about insurance company resistance to that kind of pricing?

Again, Vertex is a good company, and I would invest in its future at a reasonable price. But not today's price of $93.53 per share, and not even yesterday's price of $66.61. Not on current sales, and not on the trial data.

For my coverage, including summaries of analyst conferences and articles at Seeking Alpha, check out:

Regeneron (REGN)
Vertex (VRTX)
Gilead (GILD)

In any case, be sure to ... Keep Diversified!

Tuesday, June 17, 2014

My Gilead (GILD) Whisper: $180 per share.

I would not say it is a sure thing, but when I look at Gilead Sciences (GILD), which lately has been hovering around $80 per share, I think it will go to $180 per share by about a year from now.

I'm not going to write a Seeking Alpha article to that effect (my latest on Gilead was: Gilead Down On Merck-Idenix Deal, But Little To Fear on June 9), but the reasoning is fairly simple.

Gilead's Q1 non-GAAP earnings per share were $1.48, a 169% sequential jump and 210 jump from year-earlier. This was a result of the first full quarter of sales of Sovaldi, the new cure for Hepatitis C.

While q/q fluctuations can be expected, I expect a base EPS of $1.50 per share per quarter going forward, and likely trending above that as we head into 2015.

Which means at the end of 2014 trailing non-GAAP EPS will be in the vicinity of $3.00.

By then investors, including big institutional investors, should realize that the ride is not over, that because of new therapies coming to market, and international expansion of existing therapies, growth will continue at a good (if difficult to predict exactly yet) rate.

Which means that GILD should command a P/E premium over slower-growing stock. To me, rule of thumb, that would be a P/E of 30.

30 x $6 = $180.

Of course, non-GAAP EPS will be a bit lower, and you can get very different numbers by projecting different P/Es.

I am at my portfolio limit in GILD, and if it does go up that much, I will be "forced" to sell by my portfolio rules that limit the % I can hold of any one stock. Which is great, because I have an eye on several much smaller biotech stocks that I would like to invest in now, because they may be great in 3 to 5 years.

But keep diversified, because all stock investments involve risks, including unknown unknowns.

Tuesday, June 10, 2014

Gilead Sciences (GILD) Buy Op & Other Thoughts

New post at Seeking Alpha:

Gilead Sinks on Merck-Idenix Deal, in which I argue Gilead is not very threatened and remains undervalued. I am overweight in Gilead, and in for the long run, but if you don't own Gilead it is worth a look. My best guess is that the cash keeps rolling in from Hepatitis C cures, and GILD is up another 50% or so over the next year or so, and even that will leave it at a lower P/E.

I am not going to cover it, but I bought an incredibly tiny amount of Opexa Therapeutics (OPXA) on May 29. I already own Biogen Idec (BIIB), so I know a bit about multiple sclerosis. Opexa has a totally different approach, an immunological one, and results are mixed so far, but a Phase II trial is underway. The results are not due until 2016, and then usually even with positive data a Phase III trial would be needed. So it is both a long shot and a long term investment.

I think the market overall is fairly valued on a current basis, which means about 1/2 of stocks are overvalued and 1/2 undervalued. So it is a stock-picker's market. On the other hand, I believe the economy has years of expansion ahead of it, so in 3 to 5 years I expect the market to be up. In that case, even an index fund would do more for your savings than CDs or bonds. We are not in a stock market bubble yet, but if one appears, sell into it (most people buy into bubbles, that is why they are bubbles).

What stocks are overvalued or undervalued is a matter of opinion. I tend to look two to three years out, so I include the value of biotechnology pipelines.