Summary

  • I look at three biotech stocks that even conservative investors can include in their retirement portfolio.
  • All three stocks have beta lower than the average for the biotech sector.
  • Gilead, Amgen and Regeneron are the three top picks for retirement portfolio.

The biotech sector is generally seen as riskier than most other sectors when it comes to investing in equities. According to data from Stern, the biotech sector has an unlevered beta of 1.02, which is above the unlevered beta for the total market (0.67). In non-financial language, this means that the biotech sector offers a higher rate of return than the market but also poses more risk. When creating a portfolio for retirement, most investors want to minimize the risk while generating steady returns. The idea is to see some capital appreciation and at the same time generate steady income by investing in low beta, dividend paying stocks. Therefore many retirement portfolios exclude biotech sector completely. That is a big mistake.

The risk in the biotech sector is mostly constituted in the small and mid-cap space. Most companies in these space are either in development stage or have just reached commercialization stage. Also many of these companies have just one or two drugs in their pipeline and therefore the chances of failure are higher. Certainly, conservative investors should stay away from these. But there are other opportunities, mainly in the large cap space, where even conservative investors can gain exposure. I will be highlighting a few biotech stocks that even conservative investors should consider including in their retirement portfolio.

Gilead Sciences (NASDAQ:GILD)

Regular readers of my articles here on Seeking Alpha would be well aware that I have been extremely bullish on Gilead Sciences for over the past year or so. The reason is simple. Gilead, unlike the general perception, is not a one-trick pony. The company has two successful franchises, both in the antiviral area. GILD's HCV franchise has seen phenomenal success since the launch of Sovaldi almost two years ago. In fact, its the huge success of HCV drugs that has created the image that GILD is heavily reliant on just its HCV drugs. But there is the HIV franchise as well, which is seeing robust growth and with the introduction of TAF-based products is going to maintain its dominance in the multi-billion dollar HIV treatment market.

What I have always admired about Gilead is its proactive approach. For example, the company has been proactive in bringing its TAF-based products to the market. Gilead has been a dominant player in the HIV space for many years, however, this dominance was challenged by Triumeq. The introduction of the TAF-based products will allow GILD to not only maintain its market share but even win back some share from Triumeq.

Another example of GILD's proactiveness is the company's strengthening of its HCV franchise. Then there are other exciting areas where Gilead has a presence. One of them is NASH. Gilead already has products in its pipeline targeting what could be a $40 billion market. And the company raised $10 billion in a debt offering earlier this year, which it is likely to use to acquire late-stage development assets most likely in the liver space where it already has significant presence through its HCV drugs.

Gilead certainly has the drivers for future growth, which in my opinion will lead to significant capital appreciation in the next four to five years. To add to this, GILD is an extremely shareholder friendly company. On the back of the success of its HCV franchise, GILD has announced share buybacks and also pays regular quarterly dividend, both uncommon for growth stage companies which Gilead is despite the fact it already has a market cap of almost $150 billion.

Gilead has a beta of 0.82, which is lower than the average for the biotech sector. Even in a year that seen the biotech sector come under pressure, GILD has managed to generate returns of nearly 9.90%.

Amgen (NASDAQ:AMGN)

Amgen is another solid large cap biotech company that offers a higher rate of return than the market in the long term but has a beta below 1. AMGN's beta is 0.73, lower than GILD's and well below the average for the biotech sector. AMGN's beta is in fact closer to the average for the total market. Low volatility, however, does not mean low returns. Over the last five years, AMGN has returned more than 188%.

Earlier this month, AMGN announced a 27% hike in its quarterly dividend. As a result of the dividend hike, AMGN now offers a dividend yield of 2.45%. The yield is not the most attractive but remember that AMGN offers substantial capital appreciation over the next four to five years. The current consensus forecast for 2016 revenue is at $22.28 billion. Based on this estimate, AMGN currently trades at around 5.5x sales. This is below the industry average of 10x sales, according to data from Stern. There is at least 30%-40% upside in AMGN in the next two to three years, in my opinion.

One of the value drivers for Amgen will be its PCSK9 inhibitor, Repatha. Repatha is expected to be a blockbuster drug despite competition.

Regeneron (NASDAQ:REGN)

The competition to AMGN's Repatha is going to come from Regenron and Sanofi's (NYSE:SNY) Praluent. Praluent is also expected to be a blockbuster drug for REGN and Sanofi. Recently, Praluent was selected by UnitedHealth Group for preferred access its formularies, which include OptumRx and UnitedHealthcare Commercial. Praluent is now accessible to more than 100 million patients in the U.S. One of the concerns before the launch of Praluent, as well as Repatha, was that PBMs might shun them because of their pricing. However, both Amgen and REGN have managed to strike deals with PBMs since launch.

REGN is also seeing robust growth for its EYLEA Injection. In the third quarter of 2015, REGN saw a 53% increase in EYLEA Injection global net sales. In the U.S. alone, the company generated $734 million in sales. Total EYLEA sales exceeded $1 billion.

Among the three stocks I have discussed in this article, REGN is the most expensive, trading at forward P/E of 35.97 compared to 15.35 for AMGN and 8.68 for GILD. Also unlike GILD and AMGN, REGN currently does not offer any dividend payments. Also it has a slightly higher beta (0.96) than the other two. But REGN has the potential to nearly double from current levels even if the company maintains steady revenue growth of 20% over the next five years. REGN's revenue should exceed $10 billion by the end of this decade if it maintains 20% growth over the next five years. Maintaining this level of growth over the next five years will not be difficult considering the potential of Praluent and how EYLEA sales have evolved. In fact, the sales forecast might turn out to be conservative. But even based on it and the average price to sales multiple of 10x, I get a price per share of $1000 for REGN.