Biotech's Blue Chip Stocks

Source: NYSE, Facebook.

When it comes to investing for the long-term and establishing a retirement portfolio that can deliver both growth and income, investors often turn to "blue chip" stocks.

What's a blue chip stock? It's a company that's considered financially sound and a leader within its industry or sector, and is often looked upon by Wall Street and investors as a determinant of whether an industry is growing or contracting.

Traditionally, blue chip status has often been reserved for consumer goods or technology giants, such as Coca-Colaor IBM. However, in recent years a new class of blue chip stocks has emerged in one of the most unlikely of industries: biotechnology.

In roughly a decade's time four biotech blue chip stocks have emerged which all possess similar qualities: they have deep product and development pipelines and substantial cash flow generation capabilities. To boot, two of the four pay dividends, and all four biotech blue chip stocks have market values well in excess of $90 billion, implying sound business models.

Source: Amgen, Flickr.

Let's briefly take a look at these four biotech blue chip stocks, and then I'll pick a favorite (or maybe two).

Amgen is arguably the original biotech blue chip stock. Having been healthfully profitable for years on the coattails of white blood cell enhancer Neulasta/Neuopgen and a bevy of other products, Amgen was the first biotech blue chip stock to initiate a dividend, and has regularly bought back its common stock in order to boost its EPS.

What makes Amgen a particular standout these days is its pledge to report results on 10 late-stage compounds between 2014 and 2016. With two Food and Drug Administration approvals already in the bag (Blincyto and Corlanor), Amgen has Wall Street abuzz with its near-term growth potential.

Gilead Sciencesis the monster of the bunch, with a market valuation of nearly $160 billion. Gilead's claim to fame has been its hepatitis C duo of Sovaldi and Harvoni which greatly improved the cure rate of HCV to 90%-plus in most clinical studies, and made worlds of difference in terms of patient quality of care, eliminating the need for side effect-laden interferon and ribavirin.

Additionally, Gilead holds Stribild, a four-in-one HIV/AIDS pill that demonstrated undetectable levels of HIV in 90% of patients after 48 weeks in clinical studies, leading to its approval in 2012. With a deep pipeline full of other liver disease candidates, including hepatitis B and nonalcoholic steatohepatitis, Gilead could have decades of growth to come. It also recently implemented a dividend.

Celgene and its roughly $95 billion market cap has largely been reliant on blood cancer drug Revlimid, which accounted for roughly two-thirds of its 2014 total sales.Looking ahead, Celgene will lean on Revlimid, cancer drug Abraxane, and anti-inflammatory Otezla to provide the bulk of its growth in the coming decade.

Best of all, Celgene is managing to grow its product portfolio and pipeline primarily through organic means. On top of novel drug development, Celgene is looking to expand the label indications of its three aforementioned drugs, which should extend their patent shelf life and ultimately boost Celgene's top and bottom lines. Celgene is also a big believe in collaborations, claiming more than two dozen partnerships at present.

Source: Biogen.

Lastly, there's Biogen , which has made a name for itself by focusing the majority of its product portfolio and research in the therapeutic area of multiple sclerosis. Relapse-remitting MS drug Tecfidera has rapidly grown into Biogen's most important product in less than two years after it reduced MS relapses by close to half in the clinical studies that led to its approval.

All but approximately $200 million of Biogen's $8.2 billion in product sales in 2014 were derived from MS products such as Tecfidera, Tysabri, Avonex, Fampyra, and Plegridy.

Beyond MS, Biogen had two hemophilia drugs (Eloctate and Alprolix) approved by the FDA in 2014 which could have combined sales potential of more than $1 billion, and it's sitting on two potential gold mines with aducanumab, an experimental Alzheimer's disease drug that demonstrated strong efficacy in a phase 1b study, and Anti-Lingo-1, which is intended to not just abate, but potentially begin to reverse MS symptoms as a next-generation therapy.

The best biotech blue chip stock is...?While all four biotech blue chip stocks would appear to have bright long-term growth prospects, the two (because I can't choose just one!) that really stand out are Gilead Sciences and Celgene.

Why not Amgen and Biogen? Amgen's share price has tripled in four years, and it could be facing a number of drug launch challenges in the coming years. To add to that, its growth rate even with its new additions may only be in the 4%-5% range due to generic competitors challenging Neupogen and Neulasta.

I'd also suggest Biogen isn't the top biotech blue chip because a lot of its valuation is dependent on one therapeutic indication (MS), and while aducanumab's early stage Alzheimer's data was phenomenal, far too many Alzheimer's disease drugs wind up flopping in late-stage studies. There's just too much uncertainty with Biogen to proclaim it the best biotech blue chip stock.

Instead, I'm going to co-award that title to Gilead and Celgene.

Gilead receives the honor not only because of its 1.7% dividend yield, but because it's downright cheap at 10 times forward earnings when you take into consideration how it's just touched the tip of the iceberg with its HCV drugs. The World Health Organization estimates HCV affects 180 million people worldwide, and Gilead treated just 150,000 last year. This is a multi-decade opportunity for Gilead to grow, and its remaining liver disease pipeline gives it ample room to extend its profits even further.

Source: Celgene.

As for Celgene, I appreciate its ability to grow organically, and through collaborations rather than acquisitions. Expanding the labels of existing drugs should soften the impact of Revlimid's exclusivity losses next decade, while its more than two dozen collaborations could allow it to license out a number of blockbuster drugs. Based on Celgene's 2020 projections of at least $20 billion in sales and $12.50 in EPS, the company still appears to have room to run.

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Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool recommends Celgene, Coca-Cola, and Gilead Sciences. The Motley Fool owns shares of Gilead Sciences and International Business Machines and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. 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.

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