Ranking The 10 Largest Biotechs By Pipeline

Introduction

My last article provided an analysis of the 10 largest pharmaceuticals by market cap and ranked them according to the clinical pipeline. I did this to highlight the importance of the clinical pipeline for the future success of a healthcare company because commercial drugs are not viable for long. While some companies may have profitable therapies on the market, it means nothing if new assets are not being developed concurrently. Therefore, I believe it is important to assess companies by a lens of their pipelines before any other factor.

For biotechnology companies, a wide, well-funded pipeline is arguably even more important than for Big Pharmaceuticals, as cash flows are needed for sustainable, profitable operations. The problem is that biotech companies are smaller than their peers, so it is difficult to fund large pipelines. That is why I will also incorporate valuation as a way to balance the playing field and determine whether what you pay for is what you get.

Like the pharma analysis, there are also some caveats to consider for this analysis, and I will address these after summarizing the ranks. I believe there will be fewer surprises in this analysis than in the pharma list, so let’s begin the summaries.

The List

To determine the 10 largest biotechnology stocks, I used Seeking Alpha to list all companies by market cap. Unlike the last analysis of big pharma, the range in market caps in the biotech companies is wide. However, I believe that the financial data points can offset the size difference, particularly if smaller companies spend more on R&D as a proportion of their revenues. We will see. The companies are as follows: AbbVie (ABBV), Amgen (AMGN), Gilead (GILD), CSL Limited (OTCPK:CSLLY), Regeneron (RGEN), Vertex (VRTX), Moderna (MRNA), Biogen (BIIB), BioNTech (BNTX), and Horizon (HZNP).

Metric Ranges (financials on a TTM)

• Phase 3 Trials: 1 – 18

• Phase 2 Trials: 4 – 25

• R&D Expenses / Revenues (%): 6.7 – 32.9

• Levered Free Cash Flow Margin (%): 6.59 – 54.9

• Price (market cap) / R&D Expenses: 12.4 – 79.9

• Price / Cash Flow: 2.97 – 35.1

The Results

#1 Gilead

• Phase 3 Trials: 16

• Phase 2 Trials: 25

• R&D Expenses / Revenues (%): 32.9

• Levered Free Cash Flow Margin (%): 31.7

• Price (market cap) / R&D Expenses: 12.4

• Price / Cash Flow: 11.4

Gilead is an interesting company that has found a profitable niche in treating viral infections, particularly relating to HIV and Hepatitis. This also led to the use of Remdesivir for COVID-19. However, as highlighted by a first and third ranking in the number of Phase 3 and 2 trials, respectively, the company is expanding their pipeline rapidly. Also, GILD is highly profitable with the highest R&D Expense percentage and fourth highest LFCF margin. Part of this is due to a boost in COVID-related sales of Remdesivir, but the treatment has not been considered first-line for some time. Therefore, considering first place rank in Price / R&D and 3rd in Price / Cash Flow, Gilead is a fair value and worthy of first position.

#2 AbbVie

• Phase 3 Trials: 18

• Phase 2 Trials: 21

• R&D Expenses / Revenues (%): 12.8

• Levered Free Cash Flow Margin (%): 34.9

• Price (market cap) / R&D Expenses: 39.8

• Price / Cash Flow: 13

AbbVie is an investor favorite due to high profitability and a focus on a high dividend yield. This is possible with the 3rd highest LFCF margin of 34.9%. The company also has a large pipeline, ranking first for Phase 3 and 2nd for Phase 2. However, issues with a lack of R&D spending when compared to revenues and the market cap prevent AbbVie from placing first. If up against pharmaceuticals, AbbVie would be far down the list as well. Being expensive and lacking the investment in future opportunities suggest investors may see underperformance in the coming years.

#3 Amgen

• Phase 3 Trials: 17

• Phase 2 Trials: 8

• R&D Expenses / Revenues (%): 18.2

• Levered Free Cash Flow Margin (%): 35.4

• Price (market cap) / R&D Expenses: 32.9

• Price / Cash Flow: 14.9

What biologics leader Amgen lacks in terms of value, they make up for with many Phase 3 trials and free cash flow being ranked 2nd for each metric. The issue is R&D expenditures are low across the board, ranking 6th and 8th for R&D/Revenues and Price/R&D, respectively. Also, the high LFCF margins does not lead to a low price over cash flow, and Amgen is ranked 6th for that indicator. While currently overvalued, the large amounts of P3 trials may become approved and the valuation will fall in time. It is just unfortunate AMGN is not undervalued now as that would lead to a great opportunity.

#4 Biogen (Tie)

• Phase 3 Trials: 11

• Phase 2 Trials: 8

• R&D Expenses / Revenues (%): 28.1

• Levered Free Cash Flow Margin (%): 22.3

• Price (market cap) / R&D Expenses: 17.3

• Price / Cash Flow: 16.8

Biogen is in the spotlight due to their Alzheimer’s therapies, but the reliance on those moonshots may come back to haunt the company. BIIB ranks 5th for the number of both P2 and P3 trials, and R&D Expenses are in the middle of the pack (4th for R&D/Revenues). With investments in marketing and manufacturing Aduhelm and Leqembi reducing cash flows, Biogen is also poorly ranked at 7th for both cash flow metrics. With uncertainty over the future of the two therapies and an average pipeline, I am worried about the future prospects of the company.

#4 Regeneron (Tie)

• Phase 3 Trials: 10

• Phase 2 Trials: 11

• R&D Expenses / Revenues (%): 25

• Levered Free Cash Flow Margin (%): 21.5

• Price (market cap) / R&D Expenses: 23.4

• Price / Cash Flow: 13.9

Regeneron is a balanced biotech with a decent pipeline that is offset by low profits at the moment. The two best metrics are a 3rd place in Price / R&D Expense and 4th in the number of P2 trials. However, 8th place in LFCF margin and 6th in the number of P3 trials suggests that the longer-term opportunity is better than short-term. Therefore, consider watching the valuation to fall over the next few years to gain a more attractive long-term entry point.

#6 Horizon

• Phase 3 Trials: 3

• Phase 2 Trials: 13

• R&D Expenses / Revenues (%): 30.2

• Levered Free Cash Flow Margin (%): 26.7

• Price (market cap) / R&D Expenses: 27.9

• Price / Cash Flow: 22.9

Horizon may be the earliest stage, and recently acquired, biotech of the list, but the company performs well considering some weaknesses. R&D expenses are high as the company focuses on early-stage research, but at this point HZNP only has a few P3 trials. Interestingly enough, third place Amgen will be the acquiring company, and the combined entity will have the most P3 trials and 2nd most P2 trials. However, if the acquisition does not go through, HZNP is a solid contender to pick up if the valuation falls.

#7 Moderna

• Phase 3 Trials: 4

• Phase 2 Trials: 9

• R&D Expenses / Revenues (%): 12.7

• Levered Free Cash Flow Margin (%): 17.7

• Price (market cap) / R&D Expenses: 25.4

• Price / Cash Flow: 10.5

The COVID-19 pandemic ended up being a boon for many companies, and Moderna is the start of the show. The leader in MRNA technology was able to gain billions in revenues to set their pipeline into overdrive. Now, Moderna ranks 5th in terms of Phase 2 trials. Late stage trials are still lacking, placing 7th, but this is due to the early-stage nature of the company and their technology. Investors must now consider whether the R&D Expenses will increase with time and at a sustainable price (ranked 4th for P/R&D). I believe that out of all the COVID beneficiaries, MRNA has the best future opportunity in the intermediate term.

#8 BioNTech

• Phase 3 Trials: 1

• Phase 2 Trials: 5

• R&D Expenses / Revenues (%): 6.7

• Levered Free Cash Flow Margin (%): 54.9

• Price (market cap) / R&D Expenses: 28.7

• Price / Cash Flow: 2.97

BioNTech is another beneficiary of the pandemic due to their vaccine partnership with Pfizer (PFE). This has caused the company to be ranked first in LFCF margin and P/CF, but last in the number of Phase 3 trials and R&D expenses. Current investors must look for the current cash flows from the vaccines to fill out the early stage pipeline, but reward will not be earned for at least 3-5 years. Therefore, despite the low valuation, I would avoid this holding for now until the R&D expenses and number of P2/3 trials increase.

#9 Vertex

• Phase 3 Trials: 3

• Phase 2 Trials: 4

• R&D Expenses / Revenues (%): 30.3

• Levered Free Cash Flow Margin (%): 28.3

• Price (market cap) / R&D Expenses: 28.3

• Price / Cash Flow: 18.4

Vertex is an interesting company because I believed they would have been ranked higher. As one of the larger and more popular biotech companies, an issue that is present is both overvaluation and limited opportunity. First, VRTX ranks 8th and 10th for Phase 3 and 2 trials, respectively, indicating limited future cash flow opportunities. This is despite ranking 2nd in terms of R&D expenses to revenues, suggesting much of their work remains in the early stages (pre-clinical/P1). The company is also mid-ranked at 5th in terms of LFCF margin, suggesting limited funds to reinvest in growth. As such, the overvaluation data makes me hesitant to believe strong returns will occur.

#10 CSL Limited

• Phase 3 Trials: 13

• Phase 2 Trials: 8

• R&D Expenses / Revenues (%): 11

• Levered Free Cash Flow Margin (%): 6.6

• Price (market cap) / R&D Expenses: 79.9

• Price / Cash Flow: 35.1

CSL Limited offers a look at a well-performing company that may be unjustly punished for a different financial profile than other biotech peers. As a leader in plasma-based therapies, infectious disease vaccination, and antivenom production for the Australian government (lots of scary spiders and snakes), I believe the financials do not reflect the opportunity. CSL also has the 4th most P3 trials, and 6th most Phase 2 trials, all at low R&D Expense. This may end up providing far higher LFCF margins in the coming years as assets are approved. There are also differences in financial reporting that can be influencing the data. Therefore, CSLLY is better served by an individualized analysis rather than comparisons to peers.

Conclusion

As discussed, there are a few caveats to consider that can shift the data. First, despite the large variation in performance across the entire list, the average score across all metrics was between 4.3 and 6.5 for ranks 2-9. This contrasts with the pharmaceuticals that had far more variation in results (rank 2 was 3.5 while rank 8 was 7). The close nature of the results indicates that small differences in other outside financial or qualitative indicators will have significant effects on the performance of each company. The similar data also suggests that the group may perform similarly in the long-run, despite differences.

As such, I feel less confident in using this ranking analysis to find investment conclusions than with the pharma ranks. However, it is clear that biotechs live on the edge with a boom-or-bust mindset based on the small pipelines and high R&D expenses. Investors also rate these companies quite highly, and that may indicate pipelines with a higher degree of success. Considering these companies are 2-5x smaller than the pharmaceutical names, long-term investors will likely see favorable returns in 10 years or more despite overvaluation. The problem is short-term performance is catalyst driven and the data cannot reflect that to a high degree.

For now, I would feel confident in the success of Gilead alone, as the other holdings all have glaring weak points. Therefore, investors should take a careful look at these holdings and determine whether it may be time to trim strong performers for some other assets that may be at better valuations. As always, I will continue to share my thoughts on a range of healthcare and technology companies, and right now I am focusing on sifting for strong buys in an uncertain market. Stay tuned for more.

Thanks for reading. Feel free to share your thoughts on each biotech in the comments.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.