Bottom Fishing Club: Alkermes offers great value and safety (NASDAQ:ALKS)

Over the past few weeks, I have focused my research on the pharmaceutical sector of the market.I’ve just posted a repeat of a solid bullish argument for owning pfizer (PFE) here. A number of prescription drug names appear to be the tipping point for an influx of defensive, safety-minded capital. My research on technical momentum suggests that after several years of blowouts and underperformance, the industry could be on the verge of a big rally.

The argument for a reversal could be a bear market on Wall Street. In general, for the rest of 2024, the investment interest scale is about to shift from growth (chasing Big Tech – AI) to value themes. Given the drugmaker’s near-recession-proof business model and historic outperformance during the S&P 500’s deep decline, we suggest increasing exposure to companies such as: Alkermes company (Nasdaq:Arcus).

Alkermes reported a little First quarter results were lower than expected A few weeks ago, the stock price was down nearly -30% since February. The good news for investors is that the company (1) remains highly profitable from royalties and sales of its four drugs, (2) maintains one of the strongest balance sheets in the pharmaceutical industry, and ( 3) There is ample growth potential from existing prescriptions. The trend includes at least one promising drug in development and (4) available for purchase at a price level that seems to be a great bargain.

So if money flows into the sector in the coming months and Alkermes stands out as a better stock than its peers, the opportunity to significantly outperform U.S. stocks absolutely exists today. Let me explain some of my logic.

business

Alkermes is focused on a portfolio of patented therapies to treat alcoholism, opioid dependence, schizophrenia, and bipolar I disorder, and is currently developing treatments for neurological disorders such as narcolepsy. We also have a pipeline of clinical and preclinical drug candidates.

Aside from collaboration deals and royalties, the majority of the company’s revenue essentially comes from four products: Vivitrol, Aristada, Rivalviand Vumeriti.

A summary of our 2023 achievements and 2024 goals can be found in our latest document. April company briefing session. Below, we’ve excerpted the slides that best explain the operation. The most promising candidate for research and development is ALKS 2680, a drug for the treatment of narcolepsy sleep disorder that is about to enter phase 2 trials.

strong balance sheet

Alkermes’ balance sheet is well-positioned to fund future growth and make additional small acquisitions of promising medicines in the field of neuroscience. Considering all the risks to the economy and the world this year, having a ton of cash and a nearly risk-free interest yield that earns him 5% isn’t the worst asset to own.

As of the end of March, with $745 million in cash versus $290 million in debt and $1.47 billion in current assets versus $869 million in total debt, the company had an A+ rating compared to its pharmaceutical industry peers. It has a conservative balance sheet structure.

Compared to today’s stock price of $24, $7 of this price is backed by net tangible book value. By comparison, very few diversified pharmaceutical companies have tangible book values. The acquisition costs of pharmaceuticals generate large amounts of goodwill, and patent-protected research generates similarly large amounts of intangible “assets” on the balance sheets of most major companies.

From Alkermes’ Q1 2024 balance sheet below, I’ve highlighted the large cash position in green and the very low goodwill/intangible numbers in red. In my opinion, both are great additions to stock investing.

Underestimation discussion

Considering the overflowing cash position and limited debt, what I pay attention to in terms of business evaluation is “corporate valuation.” EBITDA and EV to revenue ratios are incredibly low for a company with sound management, high profit margins, diversified pharmaceutical sales, and a stable to slow growth outlook. In fact, it’s hard to find a peer or competitor in the pharmaceutical industry today with similar fundamentals at such a low valuation. Certainly, you can find other mid-sized pharma companies with lower EV ratios. But they have plateauing income levels, serious patent litigation risks, or rotten balance sheets.

Even compared to major pharmaceutical companies with diversified business results, Alkermes’s current stock price makes it clear that it is extremely undervalued. Whether you calculate EV to EBITDA (8x 2024 Forward Actual) or EV to Revenue (2.4x 2024 Forward Actual), ALKS stands out as a real bargain. My classification group includes Pfizer. Sanofi SA (SNY), Gilead Sciences (guild), AbbVie (ABV), amgen (AMGN), GlaxoSmithKline PLC (GSK), johnson & johnson (JNJ), Novartis AG (NVS), and Merck (M.R.K.).

Even better news for shareholders is that Alkermes’ operating profit margins have been strong and rising over the past few years (the company did not make a profit from its operations until 2021). Currently, ALKS’s after-tax final margin is 25%, ranking it among the strongest in the patented drug manufacturing industry.

Considering the entire evaluation data set, Seeking Alpha’s computerized classification formula gives it an “A+” rating. Evaluation grade If you’re looking for honest fundamental business value in your pharmaceutical investment, supported by a strong balance sheet and diversified sales, Alkermes should be high on your research list.

final thoughts

Alkermes is by no means a high-growth stock. After this year, earnings and sales are expected to plateau until new products come to market (which may take several years) or management makes an acquisition/merger decision.

surely, Alkermes itself may also become an acquisition target., its large cash holdings create a very low enterprise value for anyone buying the entire business. In fact, I think there’s a pretty good chance this under-the-radar equity asset will be auctioned off before the end of the year.

Even if no suitors emerge, I still expect ALKS stock to rise significantly soon. In terms of price targets, companies currently buying around $24 per share could effectively preempt capital inflows into the pharmaceutical industry during a bear market on Wall Street. Prices of $30 to $35 could become a reality within 6 to 12 months. Nothing spectacular as an investment return, but if the S&P 500 stays at -20% or -30% by early 2025, a +25% to +45% price increase would be a prize to win Probably. This is my purchasing logic in a nutshell.

In a recession, I think a fair valuation for a stock trading at $2.50 at 12-14x EPS makes a lot of sense. This still represents a respectable 7-8% return given its large cash reserves, stable operating results, and promising new drugs in development.

What are the drawbacks? Regular risks in investing in the pharmaceutical sector are part of the Alkermes story. You cannot blindly discount future lawsuits from customers experiencing side effects or from other patent owners with similar products on the market. Although management has done a great job of increasing ALKS to substantial operating margins, reckless purchases of R&D assets cannot be ruled out.

Furthermore, there is also the risk of a stock market crash this year. The general level of valuations for U.S. stocks is high and rising (e.g., record high stock prices relative to sales, extremely high CAPE ratios, and unusually large market capitalization relative to GDP output); A downward correction in the form of a fall from the high could be sinister and frightening. In such a crash scenario, ALKS will suffer as well.

Overall, I feel that now is the time for bottom fishing. One of my favorite intraday buying and selling screens of his is shown below. I watch it in 15 minute increments. Accumulation/distribution line. Simply put, a rising line represents a serious buy, even if the price has not started an uptrend. Although it does not always work well in predicting prices, this short-term indicator is another benefit to consider in your research process. Despite the market being flat over the past 30 days, his solid intraday ADL is hard to ignore.

I rate Alkermes a buy, I own a small position in my diversified portfolio. This represents defensive healthcare and pharmaceutical exposure and should be supported by capital inflows from overgrown technology companies throughout the last seven months of 2024.

thank you for reading. Consider this article the first step in your due diligence process. We recommend that you consult a registered and experienced investment advisor before making any trades.