The Biotech Sector Rides the Merger and Acquisition Wave

(Continued from Prior Part)

Within the iShares Nasdaq Biotechnology ETF (IBB), large-cap stocks outperformed the smaller caps for the week ending July 17, 2015, when considering the top and bottom ten stocks by market cap. The average return of the top ten large caps was 5.58%, whereas the average return of the top ten small caps was 3.50%.

The large-cap stocks were helped by stocks like Celgene (CELG), Vertex Pharmaceuticals (VRTX), Illumina (ILMN), and Alexion Pharmaceuticals (ALXN) with returns of 13.19%, 9.13%, 9.25%, and 6.11%, respectively.

CELG went up on news of its Receptos (RCPT) acquisition for an estimated value of ~$7.2 billion. VRTX moved up 9.13% on the news that its Orkambi drug may get the opinion from the Committee for Medicinal Products for Human Use (or CHMP), a European Union regulator. The drug was approved by the Food and Drug Administration (or FDA) in early July 2015.

ILMN went up as Canaccord initiated coverage on the stock and gave a “buy” recommendation, saying that the new products from ILMN will give a potential leadership position in the dynamic next-generation sequencing (or NGS) market opportunity.

Among the small-cap stocks, Pernix Therapeutics Holdings (PTX) performed better with a return of 12.43%. The stock went up as Armistice Capital acquired 3.4 million shares valued at $18.97 million.

Within IBB, the average trailing 12-month price-to-earning ratio (or TTM PE) for the biotechnology sector is 46.87 and the forward TTM PE is 37.95. For the pharmaceutical sector, the average TTM PE is 43.01 and the forward TTM PE is 67.89.

Another helpful multiple is the price-to-book value (or PVB) ratio. The average PVB for biotechnology is 12.31. For healthcare products and pharmaceuticals, it is 3.84 and 11.62, respectively.

In the top ten holdings, Mylan (MYLN) has the lowest PVB of 3.69 compared to the industry average of 11.62, indicating a case of possible undervaluation of the stock. On the other hand, VRTX has the highest PVB ratio of 33.47 in contrast to the industry average of 12.31, indicating a case of possible overvaluation of the stock.

Continue to Next Part

Browse this series on Market Realist:

• Part 1 - Mergers and Acquisitions Drive the Biotech Sector
• Part 2 - Healthcare and Biotech Stocks Accelerate Their Longer-Term Trends
• Part 4 - Anacor Pharmaceuticals Outperforms the Market