Healthy Values: Biogen & Merck

02/15/2017 9:00 am EST

Focus: HEALTHCARE

John Buckingham

Editor, The Prudent Speculator

John Buckingham, editor of The Prudent Speculator, focuses on a widely-diversified portfolio of value-oriented stocks; here, he reviews two leading pharmaceutical firms with promising drug development operations.

Biogen (BIIB)

Biogen discovers, develops and delivers innovative therapies for the treatment of neurodegenerative diseases and autoimmune disorders.

While Biogen leads the $20+ billion global multiple sclerosis market with Avonex, Tysabri, and Tecfidera (which should secure the firm’s leadership for the next several years), shares are down since the election.

True, BIIB recently had disappointing results from what was thought to be a promising compound, but we are optimistic about its spinal muscular atrophy treatment, Spinraza, and its recent labeling by United Healthcare as proven and medically necessary.

We continue to like the prospects of Biogen’s pipeline, its strong free cash flow generation and its willingness to aggressively buy back shares while investing in the future.

With cash and marketable securities of more than $7.5 billion, BIIB also has the ability to grow via acquisition, though the company just spun off its hemophilia business into Bioverativ (BIVV), while the shares trade for just above 13 times next-12-month estimated earnings.

Merck & Co. (MRK)

Merck is a global pharmaceutical giant focused on drugs for respiratory, immunology, cardiovascular, diabetes, infectious diseases, oncology and other ailments. Merck is also a global leader in vaccines and operates an animal health division.

The company has seen its sales slow, enduring patent losses for some of its top drugs, yet it has managed consistent profitability over the last three years (adjusted EPS of $3.49, $3.59 and $3.78).

We like that MRK is slowly backing away from its patent cliff with a solid lineup of new products, including expected blockbuster cancer drug Keytruda (with 2016 growth in sales of 125%) and potential blockbuster Bridion (anesthesia), creating long-term opportunities.

We are constructive on its diabetes drug Januvia, which looks to be potentially safer than competitor’s compounds.

The firm generates high returns on invested capital, enjoys solid free cash flow and boasts a track record of returning cash to shareholders, while management is on the hunt for acquisitions and drug-licensing deals that could bolster its drug development. We also like that MRK has a yield of 3.0%.

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