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This has been an overall rough year for biotech stocks. With the iShares Biotechnology Nasdaq ETFdown more than 20% YTD, investors have learned more than ever that betting on biotech is always a risky business. However, as is often the case when the baby is thrown out with the bathwater, this downturn in biotech valuations has created some interesting buying opportunities.
Amid this sea of red tape, I believe investors would be wise to take a second look at beaten-down blue-chip biotech stocks Celgene Corporation (NASDAQ: CELG) and Bristol-Myers Squibb (NYSE: BMY).
Celgene is a best-in-class cancer specialist working on diversifying its revenue streams
Celgene is undoubtedly the market leader within the blood cancer space. Its crown jewel, Revlimid, accounts for more than 60% market share in first- and second-line multiple myeloma, as well as 63% of overall sales. As its never a good idea to see a company relying on a single product to drive future growth, Celgene management has made the wise decision to invest in diversifying its revenue streams outside Revlimid -- and to great success. Celgene now hosts several other drug franchises, most of which are also growing like gangbusters:
Data source: Celgene.
Even so, it appears Wall Street has paid Celgene's rapidly growing and diversified revenue streams little mind, as shares are down around 13% year to date.
For long-term investors, I believe this draw-down provides a rare opportunity for growth at a reasonable price. On a valuation basis, while Celgene trades at a whopping trailing-12-month P/E of 44, it trades at a much more reasonable forward P/E of 15. Celgene also shines on the PEG ratio (defined as the P/E ratio divided by the expected growth rate in earnings), at 0.8. Generally, a PEG ratio below 1 is a signal that investors are paying less in price for a stock than what its growth potential should command.
Although shares have taken a beating, Bristol-Myers still represents a long-term growth story
Bristol-Myers investors have had a rough couple of months, as shares have fallen more than 30% since their July highs.
This was due primarily to a series of data releases announcing that blockbuster immunotherapy drug Opdivo failed to meet its primary endpoint in a phase 3 trial as a first-line monotherapy for non-small cell lung cancer. While Opdivo's failure in this study is certainly disappointing, investors should make note that cancer immunotherapies are continually moving more toward combination treatments. Opdivo is already the foundational cornerstone of multiple such combination therapies and is currently in dozens of new trials, so I am confident that Opdivo will continue to drive much of Bristol's growth into the future.
Plus, much like Celgene, Bristol is no one-trick-pony. The company sports a grand total of nine drug products or franchises each earning $1 billion or more in revenue annually. Of particular note is Bristol's oral blood-thinning agent, Eliquis, which has seen rapidly growing sales since its approval for use following hip and knee replacement surgery and for the treatment of deep-vein blood clots and pulmonary embolisms in 2014. As of Q3, sales of Eliquis came in at $884 million, up an astounding 99% year-over-year increase, and putting the drug on track for a more than $3 billion annualized run rate.
On a valuation basis, Bristol shares have also come down to a level where I believe they offer the potential for significant upside. With a forward P/E of around 16 times next year's earnings, a PEG ratio just over 1, and around a 3% dividend yield, I believe Bristol is now undervalued relative to its growth prospects.
Is Celgene or Bristol-Myers the best pick for your portfolio?
While Bristol-Myers shares have come down much farther than Celgene shares this year, that doesn't necessarily mean Bristol shares are more attractive here for the long term. As some analysts have said, the failure of Opdivo in non-small cell lung cancer could represent as much as a $4 billion loss of peak annual sales for Opdivo,so it makes sense for the company's market cap to decline accordingly. Celgene, meanwhile, has seen no such failure in such a large indication. Additionally, Celgene's historically trustworthy management has reaffirmed its guidance toward revenue of $21 billion and $13 per share in earnings by 2020, making Celgene a steal at today's prices. While both are good value today, I'd pick Celgene as the long-term play.
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David Liang owns shares of Bristol-Myers Squibb. The Motley Fool owns shares of and recommends Celgene. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.