For those who believe biotechnology is the new dotcom, biotech is like a poison mushroom. Pretty to look at but deadly to consume. For those who believe opportunity is near, biotech is totally edible.
The problem is, as with all attractive sectors, there’s money to be made if timing is right and money to be lost if you stumble. Hence the arguments for and against.
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M&A Could Save The Day
Right now, biotech is a beaten-down space. So beaten-down, in fact, many investors have been hoping for a little M&A action to juice up the game.
Pfizer’s (NYSE:PFEC) agreement to acquire Anacor Pharmaceuticals (:ANACN/A) for $5.2 billion May 16 could turn out to be a good start. So could Sanofi’s (NYSE:SNYF) attempts to buy out Medication (:MDVNN/A).
Takeover attempts indicate stocks are a bargain. When the M&A vultures start to circle, investors may want to take heed.
John McCamant of the Medical Technology Stock Letter suggests looking for biotech firms with approved products as potential takeover targets. McCamant includes Acadia (NASDAQ:ACADC), a company doing research with Parkinson’s and Alzheimer’s. The company’s first Alzheimer’s related product was recently approved.
Absent takeover attempts, some stocks are still attractive based on the fact they are so undervalued. According to analysts, some large cap biotechs fit that bill including Biogen Inc. (NASDAQ:BIIBC).
A big part of the value of Biogen, which has a number of drugs on the market, comes from future products including one for multiple sclerosis and another for Alzheimer’s.
On the exchange-traded fund front, the iShares Nasdaq Biotechnology ETF is near 52-week lows, demonstrating that large biotech companies are value plays at the moment, according to McCamant.
Others see the so-called M&A potential and cheap valuation as nothing more than false hope, pointing to the number of mergers that took place following the dotcom bubble burst. Any rally in “bear” world is seen as more of a “pause” than a turn around.
Earnings Are Not There
One major issue is the fact that many biotech firms are known more as “science projects” than actual companies. They have very smart people working on promising ideas, but nothing much to sell yet.
Companies without approved drugs can’t be profitable at the moment making perceived value something that is based on future promise. This is where the bears point to the dotcom era as a cautionary tale.
Based on the “unprofitability” factor, the afore-mentioned Acadia with forward EPS of -$0.48 and a P/E ratio of -20.26 makes this company a risky play. Optimistic investors will rely on recent drug approvals to turn the tide. Pessimists, will sit this one out.
Another widely-held stock in the negative is Neurocrine Biosciences Inc. (NASDAQ:NBIXC), sitting on a forward EPS of -$0.50 and a P/E of -38.01. Also in the space, Intercept Pharmaceuticals Inc. (NASDAQ:ICPTC) whose forward EPS is -$3.81 and with a P/E ratio sitting at -10.37.
Whether hunting mushrooms or hidden gems in biotech, caution, research and a willingness to not gather up everything you see is key to success and good health, including financial health.