Mr. Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high-net-worth clients.
What are we looking for?
Last spring, the Nasdaq Biotechnology Index tumbled 22 per cent in about six weeks. A recent rally, however, has reversed the March selloff and the index set a record high last month. For much of this industry, earnings are growing at phenomenal rates that are absent in most other sectors. And the current Ebola virus scare has brought biotechnology into the forefront.
The screen
My colleague Rob Belanger and I started with North American biotechnology companies larger than $500-million (U.S.) in market capitalization and sorted them from the largest to the smallest.
Only companies with an earnings per share (EPS) growth rate of 10 per cent or greater are included.
EV/EBITDA (enterprise value divided by the earnings before interest, taxes, depreciation and amortization) is a value ratio that looks at a firm the way a potential acquirer would because it includes debt. A low number is preferred.
Operating margin (OM) is a measurement of what portion of a company's revenue is left over after paying for variable costs such as wages and inventory. If a company has an operating margin of 10 per cent it means that it makes 10 cents before interest and taxes for every dollar of sales. All companies had to have an OM greater than 5 per cent.
Debt/EBITDA is the measure of a company's ability to pay off its debt. It compares the financial obligation inclusive of debt and other liabilities to the actual cash earnings of the company ignoring interest, taxes, depreciation and amortization. A low number means the company has sufficient funds to meet its obligations.
Sales growth for the past year had to be positive.
Return on equity (ROE) measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. A high number is favoured, and only companies with an ROE greater than 4 per cent are included.
R&D/net sales is the percentage of sales that is spent on research and development. A low number is preferred.
What did we find?
Gilead Sciences was the only company to outperform the averages in every category. The hepatitis C pill Sovaldi has achieved a dominant market position, complementing the company's market leading HIV medicines franchise.
Contact an industry professional or conduct further research before buying any of the companies listed here.