When President Trump was elected into office last November, the stock market rallied. Investors were excited about his agenda being pro-business and loosening regulations and potentially lowering taxes. But one sector, drug stocks, was faced with mixed emotions.
Drug stocks were excited about the potential of lower taxes and loose regulation, but President Trump also vowed to get drug prices lowered. While not all drug stocks will be harmed a great deal by this, there are a couple of them that will. This post will highlight the 3 toxic drug stocks you should avoid as they have major headwinds they must get through before they are worth your investment dollars.
3 Toxic Drug Stocks To Avoid For Now
#1. Mylan (NYSE: MYL)
Mylan was in the news last year regarding the pricing of its EpiPen and how many consumers could no longer afford one. While that was the newsworthy story, there is a deeper, more troubling story for the company and its stock.
There is an open case against Mylan regarding it underpaying rebates to Medicare and Medicaid because it mis-classified the EpiPen. On the surface this doesn’t sound like a big deal. But it is. Some analysts estimate that the fines and penalties could come to close to $5 billion. And there are other antitrust and class action lawsuits out against Mylan as well.
So while the company reported total revenues for 2016 up 18% compared to the prior year and adjusted earnings per share up 14% for 2016, there is a large black cloud hanging over the company. The stock is currently trading at close to $30 per share, but estimates are of a $10 stock price if Mylan gets hit hard by the Department of Justice regarding the Medicare and Medicaid rebate issue.
Because of this, you are best served to avoid this drug stock.
#2. Valeant Pharmaceuticals (NYSE: VRX)
It might be tempting to look at this stock and see a bargain. You might also be thinking it will be an easy play to double or triple your money once they get things back on track. But don’t let the $10 stock price and earnings per share multiple of 3 sway you into buying this drug stock.
Valeant has a lot of issues and your money is best invested elsewhere. For starters, they have over $30 billion in debt. This is destroying their ability to grow the business and increase revenues. But the bad news doesn’t end there.
The company is trying feverishly to sell some of its assets to pay off this debt, but no one is buying. It’s like when there is a house that has been sitting on the market for over a year, you wait for the price to drop or give a lowball offer. You know the homeowner is probably desperate to sell, so there is no need to pay asking price.
This is what is happening with Valeant’s assets. Everyone knows they have to sell assets, so no one is willing to pay a premium when they know they can get a discount.
Finally, Valeant is also dealing with some legal issues. Their former executive Gary Tanner was offering business for kickbacks from another company. At this point, it is unclear whether any fines or penalties will be assessed against Valeant.
So this once mighty $250 stock price company has hit hard times. The stock might see a bump once the legal woes are finalized, but the company has other major issues still on its plate. It will be some time before Valeant is a stock to buy.
#3. Novavax (NASDAQ: NVAX)
As with Valeant, Novavax has hit hard times. It has 2 drugs that it was banking on approval to help the company grow revenues, but the adult version failed testing as it did not show any positive results compared to the placebo.
Unfortunately, the other drug that Novavax is hoping for approval is the same drug but for infants. It is still in early trials but many are assuming it will also fail. Without these drugs, Novavax is lost.
But they are not sitting back waiting for the trials for the infant vaccine to complete to make changes. In 2016 they announced a restricting plan and laid off 30% of the workforce. While this is a good first step to cut costs, the problem is that the company is slowly running out of cash.
Without any new vaccines on the horizon, Novavax is in trouble. You can only cut costs by so much. You need to find new revenue streams and as of this writing the well is dry for Novavax.
These 3 drug stocks have a lot of uncertainty hanging over them. While it is smart as an investor to take some risks in order to earn a return, you have to make smart, calculated risks. Investing in these 3 drug stocks are just risky. There is no definite upside as of this writing. Maybe once they are able to make some progress on shoring up their balance sheets, or in the case of Mylan, knowing their penalty, then you can re-assess and consider investing in them. But for now, you should avoid them at all costs.
This author has no positions in any stock mentioned and does not plan to open any positions in any stocks mentioned for at least 72 hours after publication of this article.