The enticing if volatile biotechs continue to intrigue investors. Some of the stocks in the fast-growing sector are more alluring than many others, but make no mistake: Biotechs should not be ignored!
“Biotech stocks are still in favor with investors for all the right reasons: constant M&A, solid clinical data, regulatory reviews, upcoming scientific conferences, selective stock picking, and technical support,” says veteran biotech analyst John McCamant, who is also editor of the Medical Technology Stock Letter, in Berkeley, California.
Teva (TEVA) & Mylan (MYL) Stock Prices Over Time | FindTheCompany
The announcement this morning that Teva Pharmaceutical Industries (TEVA) has offered to acquire Mylan NV (MYL) for $82 a share, or $40 billion, is the latest example of the rash of M&As in the biotech arena.
“The abundant cash flow from unprecedented takeovers and even share buybacks,” notes McCamant, “coupled with positive fundamentals despite high valuations make us sound like broken record – biotech sentiment is high.”
He notes that the pullback in biotech stocks at the end of the first quarter “didn’t break the index’s technical support levels and, if anything, appears to have created attractive opportinities at flush hedge and mutual funds and individuals to put cash back into the sector,” says McCamant. Right now, these two are the standout biotech stocks which M&A traders as well as opportunistic investors are focusing on.
How do you play this latest biotech development -- and which stocks are a must-buy right now?
Teva’s offer to acquire Mylan has prompted S&P Capital IQ to reiterate its buy recommendation on Mylan. One reason: Teva will have to sweeten the pot, which means Mylan’s stock potentially faces more upside swing.
“Teva would need to raise its (stock-and-cash) offer price and lower the stock component to get Mylan to agree to an offer,” says Jeffrey Loo, analyst at S&P Capital IQ. So he has raised his price target for Mylan by $13 a share, to $92, or 22 times his 2015 earnings estimate. Since the buyout announcement, Mylan’s stock has jumped as of yesterday 8.77%, to $74 a share. Teva’s stock also leaped, to $64, up 1.25%.
Loo notes that Mylan stated last week, when rumors about Teva’s buyout offer had intensified, that it would like to stay independent and that the rumored combination with Teva “lacks sound industrial logic or cultural fit.” Analysts' translation: Raise the buyout price -- the offer is very low.
Teva’s proposal values Mylan at 20 times S&P’s 2015 estimated earnings, which is just slightly above the valuation of its peers. It should be noted that before the Teva offer, Mylan had offered to acquire Perrigo (PRGO) for $205 a share, or $29 billion, in an undisclosed combination of cash and stock.
Whereas a Teva-Mylan combination would create a company with $30 billion in sales with an extensive global reach, a combined Myland-Perrigo company would create company with a pro-forma revenue of $15.3 billion, with a worldwide market for its generic and branded drugs. Because of the Teva-Mylan proposal, S&P’s Loo has raised his price target for Mylan by $13 a share, to $79, which is 19 times the analyst’s 2015 earnings estimate.
At the same time, Loo has downgraded Teva’s stock to a hold from a buy precisely because of its offer to buy Mylan.
But Jason Kolbert, biotech analyst at Maxim Group, favors Teva, which he rates as a buy. “Teva has been very clear with us that sustaining growth in a post-generic Copaxone world will ultimately be a challenge,” says Kolbert. That’s one reason Teva, he adds, is acquiring Auspex (ASPX) for $3.5 billion to strengthen the company’s neurological business base on Auspex’s efforts in developing treatments for orphan hyperkinetic movement disorders.
The Teva-Mylan deal “could create a new generics powerhouse with more than $27 billion in revenue, establishing Teva as a the leader in the space,” argues Kolbert. “This is a dramatic move by Teva and changes the footprint of the company,” he points out. Based on his “back of the envelop: calculations, Kolbert says, “we see upside at the current offer.”
According to Teva, its offer to buy Mylan is a “more attractive strategic and financial alternative for Mylan stockholders than Mylan’s proposed acquisition of Perrigo.
And Teva also emphasizes that its combination with Mylan would create an industry-leading company that would be well-positioned to transform the global generics space, as well as “create a unique and differentiated business model, leveraging on the significant assets and capabilities in generics and specialty drugs.”
Which of the two stocks should investors buy at this point? The most opportunistic way, according to several biotech pros, is to buy shares in both Teva and Mylan. Both are destined to be winners, with Teva potentially becoming a giant in the space, and Mylan is now officially in play, which could only elevate its industry status and significantly boost its stock price.
