What are we looking for?
North American biotechnology and pharmaceutical companies that are attractively priced following recent sell-offs.
The screen
The biotech industry has recently been sideswiped following comments made by U.S. Democratic presidential candidate Hillary Clinton regarding "price gouging" within the industry – and her plans to curb high drug prices should she be elected president.
The Nasdaq biotechnology index has fallen more than 20 per cent in value following record highs reached in July of this year and has left investors questioning the future prospects of biotechnology stocks. On Tuesday, the index fell 6.6 per cent.
We start by looking for North American companies in the pharmaceuticals, biotechnology and life sciences industry group that have a market capitalization of more than $1-billion (U.S.). The screen focused on companies that have seen share prices drop more than 10 per cent in the wake of Ms. Clinton's Sept. 21 announcement (calculated using Sept. 18 close). We further winnowed the list to include only those names that trade below the median forward price-to-earnings ratio (22.8) of the 25 biotech stocks that had otherwise met our criteria.
Companies that have had a recent sell-off and suffer depressed P/E values can be looked at as undervalued and present an attractive entry point for investors.
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What did we find?
The screen yielded 12 companies from both Canada and the United States that have seen significant price depreciation as of late. Most notable on the list is Valeant Pharmaceuticals International Inc., the Canadian pharmaceutical giant that, prior to Ms. Clinton's September comments, had eclipsed Royal Bank of Canada as the largest company on the Toronto Stock Exchange. Valeant has seen considerable growth over the past five years due largely in part to its acquisition strategy and ability to position itself as a large player in fragmented markets.
Concordia Healthcare Corp., headquartered in Oakville, Ont., fell victim to the unfortunate timing with a $520-million public offering – announced on Sept. 21 – to raise capital for the acquisition of Amdipharm Mercury Co. While the offering looks to be dilutive to existing shareholders, the acquisition is well suited for the business and a 39.8-per-cent sell-off appears to be unwarranted.
This commentary does not provide individualized advice or recommendations for any specific subscriber or portfolio. Investors should conduct further research before investing.
Ryan Gottschalk works in the financial and risk unit of Thomson Reuters and specializes in asset management.