Healthcare, biotech and pharmaceuticals stocks... all of a sudden, these high-fliers of the past several years are slumping. Increasing federal government scrutiny over the high price of the medications, treatments and therapies they provide has been one reason for concern. And even I concede that many stocks within these industries—especially biotech—may have gotten ahead of themselves with rich valuations that seem out of line even relative to their promising growth prospects.
The weakness in pharmaceutical stocks seems less justified given their more reasonable valuations. Still, one could argue that the lack of near-term growth for many large-cap pharmaceutical companies, such as
However, this is certainly not true of generic drug makers. Indeed, spurred by the lower cost of generic medications and the plethora of blockbuster branded drugs that have already or are expected to come off patent, demand for generics should continue to grow at high rates for many years to come. Yet most of these stocks sell at forward price/earnings multiples below those of their slower growth branded pharma counterparts, as well as relative to the overall market.
One that has been particularly hard hit is
So why the weakness? Well, the company certainly isn’t without its concerns. New specialty drug products could fail to get the necessary regulatory approvals or not gain the traction expected with patients; products currently in development or clinical trials may not produce the level of efficacy to bring them to market; and applications to produce generic products could take longer than expected to be approved due to litigation brought on by the owners of the branded drugs (which is very common). But these are risks inherent to any company that operates within this market and not something that is unique to MYL.
That’s why I think the recent sell-off in the stock has less to do with any one of these concerns than it does with investors simply wanting to take profits after what has been an exceptionally strong run-up in the stock. After all, prior its recent sell-off the stock had surged 31.8% since the end of 2013 to close at a new all-time high of $57.20 on March 4. This came on the heels of a year in which MYL jumped 58.1%.
In fact, since I recommended the stock through the Forbes Investor back in January 2012, MYL had gained 176% through March 4. If this kind of performance doesn’t invites profit-taking activity, I don’t know what does. Even I’d admit, that a gain of that magnitude is tempting—especially at a time when the stock market is weak more days than it’s not.
But if it’s one thing I’ve learned over the years, it’s to not sell shares of a company simply because of a sharp run-up in price. This is particularly true if your investment horizon is on the longer side. Because over the longer term, valuation usually wins out.
Case in point, during an investment presentation at the annual American Association of Individual Investors conference held in Orlando last November, I used MYL as an example of a stock that still offered excellent value despite the fact that it had more than doubled since I had recommended it up to that point. I specifically mentioned it as one I’d buy on any weakness. Those that followed my advice would be up about 13% since then even after the stock’s recent butchering. This is far better than the paltry 4% gain in the S&P 500 during the same period.
With MYL’s shares now selling at less than 14 times the midpoint of its $3.25-3.60 per share 2014 adjusted earnings guidance range, the recent sell-off has given investors a great buying opportunity. This doesn’t mean that the stock will rebound in short order. I also think ongoing merger and acquisition speculation could result in additional price volatility over the near term. For example, the stock rose at the beginning of the month as news broke that it was looking to acquire Swedish drug maker Meda Pharmaceuticals in a deal that would’ve created a $23 billion pharmaceutical giant. However, they quickly slid when Meda later rejected the proposal.
But I feel pretty confident in the company’s ability to deliver on its earnings per share target of at least $6 by 2018. As long as MYL's operating performance continues to trend towards that goal, the stock will climb. Buy it now and you may be surprised by just how much it’s up a year from now.
Disclosure: Mylan Inc. (MYL) is currently an open recommendation through the Forbes Investor, one of the investment newsletters I edit for Forbes.
