I have no idea what’s going to happen in the market today, but perhaps if I spend my time looking into a teaser pitch from a new newsletter I’ll be too busy to obsess over my portfolio and do something dumb during the trade war panic gyrations.
Sound good? Want to join me? Great!
The ad I was asked about was really a blog post in support of a “training webinar” that’s being offered by Dustin Pass, all about how to follow insider trading and use that to make money on stocks. We don’t know what they’re going to try to sell in the webinar, it apparently will be happening later today, but presumably they’ll be selling some kind of software or service.
And the hook, of course, is that they say they’re going to name some “insider buying” stocks in the webinar. They hint at one of these in their blog post, so that’s what we’ll look at today:
“Following tweets from President Trump that threatened higher tariffs on China, the Dow fell almost 500 points on Tuesday….
“The team at Market Trades Daily believe the move is likely temporary and has set up an opportunity to pick up a couple new stocks on the cheap.”
Given the drop we’ve seen in the market so far today, I guess we could look back fondly on last Tuesday’s fall as the “good old days” — the market is down another 2% or so now, though I have no idea where it will be in time it takes this missive to get published and reach your inbox.
(For those overly inclined to panic, I should note that this means the market is now at the abysmal, terrifying, shocking and shirt-rending level it last saw… six weeks ago, when every trader was talking about the inverted yield curve and the disaster that foretold.)
But anyway, what opportunity does Dustin Pass see for us here?
“One of those companies is one of the world’s oldest and most successful biotech companies.
“It specializes in treating neurological diseases, including multiple sclerosis, Alzheimer’s, Parkinson’s and ALS.
“The firm has an extensive drug portfolio that includes a ton of big name brands.
“The company also has something that every investor loves – PROFITS.”
Well, he’s got me there. I do love me some profits.
What else do we learn about this older biotech company?
“It generated $4.66 billion over the prior twelve months on more than $13 billion in sales.”
OK, so that narrows it down a lot… that means it’s one of the biotech companies that we should probably put in the ‘big pharma’ category, the large and established firms who have multiple products and make a lot of money.
He also says they’ve been growing sales and profits for “more than a decade,” so that would narrow it down to maybe half a dozen big companies that you could legitimately call “biotech” firms.
What other clues do we get?
“They have 20 additional drug candidates in the development pipeline with three currently in Phase 3 testing.”
And, apparently, the stock is “near multi-year lows.” So presumably there’s some bad news in there somewhere… lots of pharma companies are trading poorly as regulatory risks heat up, particularly over drug pricing, but not many are “near multi-year lows” at the moment.
Other clues? Well, this is an “insider trading” pitch, so we do hear about those buys that apparently caught Dustin’s attention:
“Last week, the CEO purchased over 4,000 shares, an investment of more than $1 million.
“At the same time, the director bought 118,342 shares in his advisory fund at a cost of more than $27 million.
“The CEO made public his belief that the selloff was an overreaction to a disappointing drug trial.”
And we’re told that the company trades at ten times earnings and seven times next year’s earnings — which is awfully cheap, as long as the company is not about to implode.
So who is it?
This is everyone’s favorite Alzheimer’s punching bag, Biogen (BIIB), which lost about a third of its value on March 21, when they announced that they were halting the Phase 3 trial of their most promising Alzheimer’s Disease drug… a drug that had showed substantial promise in earlier trials and represented a lot of hope for both investors and patients.
That was a shockingly abrupt failure, but if watching attempts at Alzheimer’s Disease drugs over the past twenty years has taught us anything, it’s that we should expect failure. Investors always get their hopes up when it comes to Alzheimer’s, just because it is by far the most overwhelmingly massive potential drug market that is not really being well-served by any existing medications — no one has come up with a good treatment for the cause of Alzheimer’s, and, indeed, there’s still little consensus about what that cause is… so, sadly, those suffering from the disease are stuck with medications that, at best, do a little bit to ameliorate the symptoms.
Biogen’s canceled trial for aducanumab sent Biogen shareholders into a tizzy, particularly when they said that they aren’t giving up — they’re continuing to advance some other drugs that (similarly to aducanumab) target amyloid plaque buildups that have been believed (without much conviction) to cause Alzheimer’s, so I guess there’s fear that the company could spend billions more on another failure… though that should always be a risk that we keep in mind when buying any pharmaceutical company. Biogen management did clearly note that they’re going to diversify their Alzheimer’s program as they move forward, at least, so they are advancing some programs both in amyloid plaque reduction and in targeting tau proteins (that’s in collaboration with Ionis Pharmaceuticals (IONS)), along with their work in other neurological diseases.
While this failed drug trial certainly disappointed investors, who had hoped that aducanumab might be the next giant blockbuster, it didn’t have any impact on Biogen’s current earnings — which continue to be very strong, thanks largely to continuing strong sales of their blockbuster drugs Tecfidera (for multiple sclerosis, a field Biogen has led with several huge drug advancements in recent decades — including Vumerity, which they hope to see approved later this year) and Spinraza (for spinal muscular atrophy).
Both of those drugs are in very competitive markets (unlike Alzheimer’s Disease), so there’s some concern about competition coming in… though that’s pretty much always the case with big drugs, and I don’t really know enough about that market to guess at whether or not investors are overreacting.
The company was certainly aggressive in asserting that their best days are not behind them — they authorized a huge share buyback on the day the aducanumab news was released (another $5 billion, on top of more than a billion that was still left on their old authorization), and there has been a little bit of insider buying to go along with that.
The buying came from the CEO, Michel Vounatsos, who bought shares on May 1 (at $231) — it was only $1 million worth of shares, not huge relative to the $3.8 million Biogen pays him, but it did increase his position by more than 20%… and by Alexander Denner, who is a hedge fund manager (he worked for Carl Icahn picking biotech investments for years, but now has his own fund) and also a Biogen board member, Denner increased his (much larger) position by almost 20% on April 30 (at $229), though he also made a large investment back in January when the stock was still in the $320s.
I should note that there has also been some insider selling… including a fairly large “exercise and sell” transaction that took place just a couple days before the stock collapsed, which looks like either very fortuitous or suspicious timing on the part of Director Robert Pangia… but is, to be fair, also pretty clearly part of a pattern of him selling $1.5-2 million worth of shares at the beginning of the year (he’s done it four of the past five years), so it was probably just business as usual… and lucky timing, though he does still own about $5 million worth of shares.
So are those CEO and Director buys important? Do they signal a bottom for the stock? We can’t know for a while, of course, but enough time has passed that the stock should have a chance to reset based on their profits and their pipeline and not trade just on sentiment about the Alzheimer’s Disease program. I don’t have any idea whether their pipeline or their investments in joint ventures will pan out, but right now the stock is clearly trading at a deep discount because of uncertainty about the future and the lack of earnings growth… but when analysts are penciling in about $30 a share in earnings for each of the next few years, you don’t need a ton to go right to have the stock work out OK.
Revenue and earnings are not really growing, true, with revenues also expected to be pretty flat from 2018-2021, but that’s still a lot of profit per share, even if those analyst estimates are juiced by the expected buybacks (buybacks reduce the number of shares, and therefore improve per-share numbers). That is, indeed, a forward PE of just over 7.
Biogen also carries a bit of debt, but any worry about the $6 billion in debt is easily washed away by their $4 billion in cash (and roughly $1.5 billion in new cash flowing in each quarter), so the balance sheet and the earnings are fine… what we have to worry about is really just the “will they be able to replace those earnings when the current products decline” problem that most pharma companies face.
The problem, of course, is that issues with Tecfidera or Spinraza could quickly change that revenue forecast… as could any big drug pricing regulatory changes, if we end up seeing a real revamp of the US healthcare system (I’d always be more comfortable betting on “things will stay about the same” than on a huge change, but you never know).
Analysts have been sticking with Biogen, though most rate it a “hold” now and have a price target in the $250s… the most interesting bull on the stock that I’ve seen is Christopher Raymond, the analyst from Piper Jaffray, who has a $280 price target and told Barron’s that “It’s fashionable to hate on Biogen right now, but we think that’s a mistake.”
Biogen is a big company, with a market cap just under $45 billion and almost $14 billion in annual sales, though the concentration in a few big drugs means it falls into that odd “large cap story stock” category with some other large pharma companies who are dealing with major patent expirations or high-risk development programs, or who are attempting to replace the sales of a real blockbuster or diversify with investments in new programs — names like AbbVie (ABBV) which is trying to plan for life after Humira, or Gilead (GILD), which has been trying to figure out how to make money after you cure all your patients (OK, that’s an exaggeration… but still).
I don’t often feel comfortable picking pharmaceutical or biotech stocks, partly because of the huge unknowns in drug pricing and approvals that can so quickly change the story, but I can see some appeal in this one — a company with a real specialty that has churned out strong drugs for neurological diseases for years seems a reasonable bet to keep it going, even if it’s never a sure bet, and I do like the little bit of insider buying. I’d probably stick with the larger pharma plays that pay dividends, including even-larger biotechs like Amgen (AMGN), but, in truth, I’ll probably avoid those, too, and just keep my pharmaceutical investing very diversified with funds or ETFs. Sometimes knowing what you’re not good at is half the battle.
With that, dear friends, I’ll turn it over to you — think it’s time to pile back in to Biogen now that the shares have settled down post-collapse? Believe they’ve got promise with their buybacks and insider buying and, more importantly, their drug development pipeline? Let us know with a comment below.