|
March 22, 2000
The biotechnology stocks have been in the news lately, because they've been
doing better after languishing for years. The history is that there was a big
rush into biotechs in the '80s, starting with the Genentech IPO.
It all ended in a crash in the early '90s.
Basically, people were overly hopeful about the payoff from this technology.
In the aftermath, there has been a shakeout. The weaker stocks are gone, and
the strong ones left are starting to see some payoff from their efforts.
With the baby boomers getting older, strong drug sales seem certain in the future.
We can apply the principles of Buffettology to the biotechs that have earnings
and a positive net worth (both nice things for a fundamentalist to see!).
I fed all the major biotechs and also the major pharmaceutical companies like
Merck into my spreadsheets and came up with three that look promising.
Andrx (ADRX)
This stock trades around $109 and earned $2.90 in the last 12 months, for a
trailing P/E of 38, compared to an industry average of 40.
Its book value is $6.08, thus a return on equity of 48%.
For the quarter ended 12/31/1999, revenues were $122 million,
versus $73 million for the year earlier period,
implying a growth rate of 67%.
The Buffettology calculations project a five year rate of return
on this stock of 53% which sounds good to me.
Their business is providing controlled-release
oral pharmaceuticals using their proprietary methods.
They're in some kind of dispute with the FTC over a deal they made
in a patent dispute to not market a certain generic drug.
I have no idea how serious this is, but perhaps they will only be
asked to stop.
Amgen (AMGN)
Amgen is the biggest biotech, with fourth quarter sales of $927 million,
versus $755 million a year earlier, for a growth rate of 23%.
Recent price $61, earnings of $1.02, and book value of $2.97, give a P/E of 60
and a ROE of 34%.
Buffettology projects a five year RR of 33%.
Earnings have been healthy for years; it's a blue chip of sorts.
Its most well known drug is Epogen, for dialysis patients.
Full disclosure: I own some Amgen stock.
Biogen (BGEN)
Recent price of $78 and trailing 12 months earnings of 1.40 give a P/E of 56.
Book value of $6.27 give a ROE of 22%.
Fourth quarter revenues were $225 million,
versus $168 million last year, for a growth rate of 34%.
Buffettology projects a five year RR of 21%.
Earnings have been growing steadily for years; it's a solid stock.
A Barron's article 3/20/00 credits it with an excellent PEG ratio
(P/E to Growth) of 1.78 based on estimated earnings and growth.
The company is known for interferon drugs.
The price is down sharply from a peak of $129 because of
recent setbacks with a congestive heart failure treatment, Adentri.
A big issue these days is: will we see a general decline in the stock market?
A lot of signs point to a bubble of excessive speculation and the Fed
seems determined to raise interest rates until the market tanks.
I think caution is in order and one ought to stick to stocks with
solid fundamentals.
© Copyright 2000 by Richard Gillmann. All Rights Reserved.
|