It might be hard to believe, but just a few days ago we celebrated the 10-year anniversary of the stock market hitting its Great Recession lows. Although the ride has been a bit bumpy at times, investors who've held on for the long run have almost certainly been rewarded.
However, as investors, we also know that not every company can be a winner. Despite being reasonably close to new all-time highs on the broad-based S&P 500, three brand-name healthcare stocks aren't doing so hot. In fact, if we were to look at the forward price-to-earnings ratios for these three healthcare stocks, we'd see that they're lower now than they've been over the last decade (if not longer). That might mean bargains abound for opportunistic investors.
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Celgene: Forward P/E of 6.7
That's right. Even with the looming acquisition of Celgene (NASDAQ: CELG) by Bristol-Myers Squibb (NYSE: BMY), which was announced at the beginning of the year, the company's forward price-to-earnings ratio of less than seven is a low point for the company over the past decade.
The biggest concern from Wall Street has always been Celgene's overreliance on blockbuster cancer drug Revlimid, which is projected to bring in roughly $10.8 billion in sales in 2019. With gross margins well in excess of 90%, Revlimid is almost singlehandedly responsible for pushing free cash flow to nearly $5 billion in each of the last two years. But at 63% of forecasted 2019 sales, Wall Street worries that when Revlimid does face generic competition, Celgene's financials will seriously falter.
Here's the thing: Celgene has gone to bat to protect its lead drug from generic competitors. Even with a small percentage of generic Revlimid becoming available in March 2022, a flood of generic Revlimid shouldn't occur until after January 2026. Assuming continued demand and pricing power for the drug, up to $40 billion in free cash flow generation between 2019 and 2026 isn't out of the question. That's pretty much two-thirds of Celgene's current market cap. This money can be -- and is being -- reinvested into cancer, immunology, and inflammation research projects that are happening internally and with its dozens of partners.
So investors are left with what I believe is a win-win scenario. If Bristol-Myers Squibb were to walk away from its proposed deal to acquire Celgene for one share of Bristol-Myers' stock plus $50 in cash per Celgene share, long-term investors should do just fine. The upcoming launch of ozanimod for multiple sclerosis -- along with a number of promising next-generation cancer drugs -- coupled with its label expansion opportunities with its existing portfolio provides more than enough runway to support a higher valuation.
Then again, if Bristol-Myers Squibb does go through with the deal, there's about a 20% arbitrage opportunity here, as well as a $9 contingent value right for Celgene shareholders if certain regulatory requirements are met for three experimental therapies. All told, Celgene looks every bit a bargain right now.
Walgreens Boots Alliance: Forward P/E of 8.6
Pharmacy and front-end retail giant Walgreens Boots Alliance (NASDAQ: WBA) is also pushing the boundaries of "cheapness." At no point over the past decade has the pharmacy chain been valued at a forward P/E of less than 10, let alone nine, as it is now.
Why is such a well-known and profitable company like Walgreens Boots Alliance down on its luck? Part of the reason relates to concerns that Amazon.com is entering the healthcare space. Amazon's deep pockets and low overhead have been a recipe for disruption in a number of industries. There's also concern that reimbursement rates are being pressured, which has some industry pundits forecasting that Walgreens will struggle to meet its profit growth forecast of 7% to 12% in fiscal 2019.
But there's also plenty to be excited about. For instance, Walgreens Boots Alliance acquired almost 2,200 stores from Rite Aid for the hefty sum of $5.2 billion. These stores provide a broader retail and pharmacy presence for Walgreens, while at the same time shrinking Rite Aid's, one of the company's core competitors. Further, the additional locations will provide cost synergies and optimizations that'll save Walgreens more than $650 million per year.
The company is also doing what it can to cut expenditures and give back to its shareholders. A recently announced cost management program seeks to reduce annual expenditures by $1 billion annually within the next three years. Combine these actions with the company's regular share repurchases (which can boost earnings per share) and a rising share of online pharmacy orders, and it's easy to see a path toward higher operating margins in the not-so-distant future.
Investors won't want to overlook its partnerships, either. For example, recently announced initiatives with FedEx, Kroger, and Humana will help keep the brand fresh in consumers' minds, which will probably make its sub-nine forward P/E a bargain.
Teva Pharmaceutical Industries: Forward P/E of 6
A third healthcare giant that's been taken to the woodshed of late is generic-drug giant Teva Pharmaceutical Industries (NYSE: TEVA), which, at a forward P/E of six, is cheaper, at least based on this metric, than it's been in a decade.
Poor Teva would need a novel to list all of the problems it's faced over the past two years. Take a deep breath, because you'll need it. The company has: reduced guidance on multiple occasions, completely halted what had been a superior dividend, restructured after going heavy into debt to acquire Actavis, seen its CEO depart, settled bribery allegations with the Justice Department, contended with generic-drug pricing weakness, and seen its best-selling branded drug (Copaxone) face generic competition of its own. Make no mistake about it, there's a reason Teva is trading at a decade-low valuation.
There are, however, reasons to believe that all the bad news is now factored in, especially with management expecting a return to growth in 2020. Though multiple sclerosis drug Copaxone and albuterol inhaler ProAir will see generic competition eat away at sales in 2019, Teva's focus on other branded medications, including migraine drug Ajovy and Huntington's disease treatment Austedo, will help hedge this sales decline.
Let's not also forget that Teva is the largest generic drugmaker in the world. When generic-drug pricing does find a bottom (presumably soon), Teva will be able to once again utilize the breadth of its product portfolio to drive growth. Plus, this is a company that has the numbers game on its side. Even with generics producing much lower margins than branded therapies, a progressively older population in the U.S. and abroad will be looking for cheaper alternatives as branded-drug prices climb.
Teva has done a bang-up job on reducing its outstanding debt, too. Removing its dividend saves more than $1 billion in cash flow annually, while selling its women's health division brought in more than $2 billion. With the company also utilizing its operating cash flow to pay down debt, Teva's net debt has declined from north of $34 billion to $27.2 billion in about two years.
To be clear, this won't be an overnight turnaround. But given Teva's pole position in generics, as well as its ability to double dip with branded therapies, a forward price-to-earnings ratio of six looks like a screaming bargain.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Sean Williams owns shares of Celgene and Teva Pharmaceutical Industries. The Motley Fool owns shares of and recommends Amazon, Celgene, and FedEx. The Motley Fool has a disclosure policy.