Evaluating Risk: Gilead Sciences, Biogen and Celgene

When it comes to large-cap biotech companies, Gilead Sciences, Biogen and Celgene are always worth investment consideration, but are not without their risks. Brian Abrahams, an analysts with RBC, recently examined the three companies in a research note to clients. Here’s a look.

Gilead Sciences has been the dominant player in hepatitis C, although its very success in that area—basically curing the disease—has led to a decrease in sales. Its HIV pipeline is still dominant, and when it acquired Kite Pharma last year, made a major push into the immuno-oncology market. Abrahams thinks the HCV market is stabilizing while the HIV drugs are becoming even more important. The company recently launched its three-drug HIV combo, Biktarvy, but it’s too soon to know exactly how it’s doing, although it’s projected to rake in $47 million in the first quarter. He wrote, "sales look to be tracking ahead of the consensus projecting out longer term, in 2019."

Matthew Zeets, writing for Seeking Alpha, generally feels that Gilead is undervalued. However, he writes, "Gilead is in an excellent spot financially with basically zero net debt and they plan on repatriating $28 billion of cash they’ve been sitting on overseas in 2018…. The biggest risks I see are how much of their valuation going forward is tied to HIV (if assuming a very quick drop for HCV as we did) and overall drug price reform. The first risk is very real as Gilead has controlled a large portion of the HIV market for a long time. While this is a competitive benefit in some ways it also leaves them vulnerable if some other company came up with an HIV cure or just even a much better product."

Biogen can sometimes be a wild card. The company is very strong in the multiple sclerosis market, but its dominance is being eaten away by the competition. Its new drug, Spinraza, for spinal muscular atrophy, appears to be doing well and gaining traction. But Biogen likes to swing for the fences, and it’s putting a lot of its resources into Alzheimer’s disease, with all eyes looking at aducanumab, which is very high risk. If it turns out to be a successful new treatment for Alzheimer’s, even a mildly successful one, it’ll have an enormous positive effect on the company. If it fails, it will be just another shot at Alzheimer’s that failed, like the literally dozens that failed before it.

Company shares lost 45 percent of their value in the first quarter, and as a result, a number of analysts have downgraded its stock. Geoff Meacham, an analyst with Barclays, downgraded the stock yesterday to "equal weight" from "overweight" and cut his price target from $395 to $295. Schaeffer’s Investment Research noted, "Making this bear note even more troubling is the fact that Meacham actually waxed optimistic on the broader biopharma sector, saying it won’t be affected by trade war fears or the privacy issues that have hurt major tech stocks. He also noted strong first-quarter earnings out of biopharma stocks and the potential for M&A activity going forward."

Abrahams, on the other hand, thought Biogen was "generally solid," although he projects that the company’s sales and earnings per share will be both slightly below projections.

What has analysts concerned, at least near-term, for Celgene, is the company’s president and chief operating officer, Scott Smith, stepped down, effective immediately. His duties will be covered by Mark Alles, the company’s chairman and chief executive officer. Zacks writes, "The sudden exit of the president has added to the woes as Smith was primarily responsible for building the Inflammation and Immunology franchise, and particularly for the launch of Otezla…. The news comes at a time when Celgene is sailing in troubled waters. Celgene’s stock has lost 18.3 percent in the last three months, worse than the industry’s decline of 7.6 percent. Shares lost 2.4 percent on the news."

The other hard hit was the FDA’s rejection of the company’s multiple sclerosis candidate, ozanimod, last month. Meanwhile, Abrahams has increased his projections for the company’s inflammation drug Otezla for the first quarter to $346 million and to $1.63 billion for the year.

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