Published Thu, 03 Sep 2015 10:30 CET by DividendYields.orgOne of the fastest-developing industries in the financial markets is biotechnology. One of the biggest challenges that the biotech companies face is high R&D costs and the need for a steady revenue stream to finance their operating activities while waiting for FDA drug approval. This makes them heavily reliant on the public markets to finance the development and manufacturing of innovative medicines.
On the upside, the biotech sector remains attractive for retail investors in spite of its high-risk. According to McKinsey, in December 2014, biotech companies accounted for the 20% of the entire pharma market with global revenues of $163 billion, while their annual growth rate was +8%, double than conventional pharmaceutical companies.
This article summarizes three mid and large-cap stocks trading in the Healthcare sector of the Biotechnology industry. Having revisited their strategies and focusing on R&D, all three companies are expected to continue to grow at a fast rate, paying higher dividends to retail investors.
Baxter International (NYSE: BAX) engages in the development, manufacturing and marketing of products for the cure of immune diseases as well as chronic and severe medical conditions. The most important milestone of the Deerfield-based biotech company in July 2015 was the corporate spin-off of the bioscience sector and the creation of Baxalta (NYSE: BXLT), a separate company that develops medicines for rare diseases and focuses on gene therapy. Baxter’s D/E ratio is below 2, however, the company is dealing with debt. Q2 2015 R&D spending increased 1%, reaching $292 million, however BAX has moved $5 billion of debt to the Baxalta balance sheet and has successfully dealt with another $1.1 of convertible bonds, thus lowering interest expenses to $30 million from $42 million (YoY -28.6%). The company’s decision to bring new products to the market over the next years, aiming to improve its positioning and long-term performance, is expected to leave room for a higher dividend given its low payout ratio. A beta of 0.31 makes BAX a safe investment.
Bio-Techne Corp. (Nasdaq: TECH) is a Minneapolis-based biotech company operating in the development, manufacturing and sale of biotech products and clinical diagnostic controls globally. The acquisition in June of Cliniqa Corporation, a company focussing on the clinical diagnostic market, is expected to boost TECH’s clinical control portfolio and improve its growth as Cliniqa has a proven track record of cash-oriented growth. In addition, the company is looking to go bigger in China, believing there is growth in the Chinese market. On the upside, TECH’s acquisition strategy is expected to create profitable opportunities that could boost profitability. On the downside, sharp fluctuations in the foreign exchange rates have reduced inventories in overseas markets, namely Japan and the Pacific, thus raising a red flag for TECH. The EPS of $1.28 is expected to average at $4.27 over the next 4 years, whereas the 5-years long-term annual growth is expected 12.5%. TECH’s D/E ratio of 0.23, far below 2, indicates that the company is not relying on debt financing, which is also reflected in the low payout ratio. A beta of 0.72 suggests a safe investment.
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Gilead Sciences (Nasdaq: GILD), headquartered in Foster City, CA, engages in the development and sale of innovative medicines for HIV and chronic hepatitis, but also cardiovascular and respiratory diseases and cancer. Q2 2015 U.S revenue reported 16% YoY growth reaching $5.6 billion, while European revenue reported 50% YoY growth in spite of the foreign exchange headwinds. The growth was driven by the launch of Harvoni hepatitis medicine across various markets around the world, the sustained growth of Sovaldi hepatitis medicine outside the U.S. and increased sales of GILD’s newer HIV single-tablet regimen. GILD’s highly differentiated product line and addition of new patients to its treatment program are both expected to improve its position and boost its growth. Analyst consensus estimates an average annual growth of 13.5% over the next five years and an average EPS of $11.26 up to 2016 (current EPS $9.53). A beta of 0.84 suggests a safe investment, leaving for a higher dividend (currently at $1.72) and long-term value for investors.
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