The biotechnology sector has been wracked by high-profile scandals this year, notably allegations of dodgy accounting and price gouging at Valeant Pharmaceuticals, a former Wall Street darling that is now the poster child for corporate malfeasance.
But on Wednesday, the biotech sector posted its biggest gains in almost five years and seems to be gathering momentum.
The biotech sector includes some of the most exciting growth stocks available, but when it comes to making money in a volatile industry, we think "boring" can be pretty sexy.
One such stock is Teva Pharmaceutical Industries (TEVA - Get Report) . It isn't considered glamorous, and many investors have never heard of it, but it could gain more than 76% this year in a broader market that is still risky.
Wednesday's big bounce came after Pfizer, one of the largest pharmaceutical companies in the world with a market capitalization of $203.90 billion, abandoned its plan to acquire Allergan, which has a market cap of $96.70 billion, for $160 billion.
This mega-merger would have allowed Pfizer to move overseas to Allergan's home country of Ireland to save anestimated $1 billion in taxes every year, a tactic dubbed "tax inversion" that President Barack Obama has vowed to fight. New rules from the U.S. Treasury Department designed to thwart tax inversions convinced Pfizer to walk away from the deal.
The scuttled merger prompted investors to speculate that Pfizer would apply its merger and acquisition war chest to other targets, which in turn fed hopes for momentum in the sector. The iShares Nasdaq Biotechnology ETF, which is down 15.53% year to date, has gained more than 9% over the past five days and jumped 5.88% on Wednesday.
Pfizer rose 5% on Wednesday, its biggest gain since 2011. Other big gainers were Celgene, which makes treatments for cancer (up 6%) and Vertex Pharmaceuticals (up 8.5%).
Biotech companies are known for product innovation, but they are also notorious for showing great promise and then crashing and burning, either because they can't get their drugs through the regulatory gauntlet or they run out of cash.
But Teva boasts a large market cap, consistently growing cash flows to sustain robust research and development, and a well-developed pipeline of drugs geared to anticipated medical needs.
With a market cap of about $51 billion, Teva is the largest generic-drug manufacturer in the world. As blockbuster drugs lose patent protection and competitors join forces to cut costs, the race is on for new generic drugs created in novel ways.
Two opportunities are pointing the way: biologics and orphan drugs, and Teva has a foot in both camps
Teva, which is based in Israel, develops patented biologic treatments, which are derived from humans, animals or microorganisms. Biologics can be composed of proteins, sugars, or living cells and tissues and include antibodies and vaccines.
Teva also is pursuing the market for "biosimilars," which are generic, less costly copies of biologics. The company is readying several new biosimilar drugs for market, to complement its existing pipeline of products.
Gene-based biologics are in the vanguard of cancer research, but as they lose patent protection the door is opening for biosimilars.
Teva owns a global patent portfolio of more than 1,000 molecules.
The company's biggest-selling products include Copaxone for the treatment of multiple sclerosis, Provigil and Nuvigil for narcolepsy and other sleep disorders, and Azilect for Parkinson's disease. It also offers Treanda for the treatment of leukemia and lymphoma.
In a coup, the company last year was granted a federal Orphan Drug Designation for a drug that treats Huntington's disease. This designation is hugely valuable to growing and innovative biotech firms, because it streamlines and hastens the government approval process, removes copious amounts of red tape and gives the drug enhanced patent protection, among other benefits.
For full-year 2015, Teva delivered record operating income, earnings per share and cash flow, while improving profitability margins across the board.
Earnings grew by 6% from a year earlier to $4.7 billion, with earnings per share of $5.46. Earnings before interest, taxes, depreciation and amortization grew by 6% to $6.6 billion, cash flow for operations grew by 8% to $5.5 billion, and free cash flow grew by 15% to $4.9 billion.
Teva this year plans to strengthen its respiratory portfolio through commercial launches of new and promising investigational drugs. In the second half this year, the company expects to submit applications for the review of breath-actuated inhalers for patients suffering from asthma.
With a trailing 12-month price-to-earnings ratio of 31.17, Teva isn't too expensive compared to the drug industry's trailing P/E of 27.9, especially in light of the stock's growth prospects.
Teva's stock jumped 4% on Wednesday but it has plenty of momentum left.
The stock trades at about $56.73; the one-year median analyst price target is $74, which would be a gain of 30.4%. On the high end, the projected target is $100, which would represent a gain of 76.2%.
Those growth projections make Teva one of the most appealing biotech opportunities out there.
By John Persinos
Source:http://www.thestreet.com/story/13522388/1/this-boring-drugmaker-could-gain-76-as-biotech-sector-bounces-back.html?kval=dontmiss
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