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Does Biogen's Lower P/E Ratio Make It a Better Buy Than Celgene?

A recent failure of a key drug under development has led to Biogen Inc(NASDAQ: BIIB) shares falling significantly. The stock is now cheaper (relative to earnings per share) than almost every other stock in its industry, including that of Celgene Corp. (NASDAQ: CELG).

Although a low price-to-earnings, or P/E, ratio makes Biogen intriguing, investors might not want to forgo buying Celgene's shares so that they can buy some in Biogen. Instead, it may be more profit-friendly to compare both of these companies' growth potential. In doing so, it may lead to discovering that Celgene is the better biotech buy despite its higher P/E.

In this clip from The Motley Fool's Industry Focus: Healthcare podcast, analyst Kristine Harjes and contributor Todd Campbell explain why.

A transcript follows the video.

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This podcast was recorded on July 1, 2016.

Kristine Harjes: Let's talk a little bit about those P/E ratios, as follow up to the last episodes. I mentioned that Biogen has gone down pretty substantially, and it looks like it's trading quite cheaply right now. Do you have a...

Todd Campbell: Both of these stocks aren't "expensive." I mean, theoretically, historically I should say, biotechnology stocks get a premium from investors because they're working on game changing medicines and the risk/reward is quite high. I mean, those medicines could fail in clinical trials, or they could go on to become multibillion-dollar blockbusters. A lot of times, especially obviously with clinical stage biotechs, you focus less attention on the P/E ratio, because there's no E to measure. That's not the case, obviously, with Biogen and Celgene, because they've been around a long time, and they both already have really, really strong product franchises that are racking up billions of dollars in sales, and they're leveraging that to generate out big earnings by share, so, yes, you have a situation where you've got Biogen trading at about 15 times trailing-12-month earnings. You've got Celgene trailing about 49 times trailing-12-month earnings, but before you draw any conclusions from that, I want to remind other listeners that the stock market is a forward-looking instrument. I tend to focus more attention on the future P/E ratio than I do the past P/E ratio.

Harjes: Yeah, that is a great point. Celgene's actually really helpful in their forward guidance. They actually say that "by 2020, this is what we're expecting," and those numbers are $13 a share in EPS, which is a pretty substantial boost. That would mean that the stock is trading today at 7.6 times that number for today's prices. In general, Celgene has historically traded pretty richly. Over the past three years or so, the average forward-looking P/E for the company was over 20, and today it stands at just under 17. It has been on the decline for years. It might be...

Campbell: I was looking at numbers today earlier, Kristine, too, and the numbers that I was sourcing out showed a future P/E over the next 12 months for Biogen of about 12 and for Celgene a little north of 14. In my view, that's not a big difference between the two. Historically, like you said, Celgene trades a little richer, but there's a reason for that. It's been growing more quickly.

Harjes: That is true. When you look at the growth numbers for these two, it does look like Celgene is positioned for more growth.

Campbell: Right. 20.7% year-over-year growth, using the last quarter on the top line for Celgene, versus 6.7% year-over growth for Biogen. Both of these companies are growing their earnings by double digit percentages, because as their sales increase, they can leverage that against fixed costs, drop more money to the bottom line. Investors are typically willing to pay up a little bit, to get faster growth, and with guidance out of Celgene calling for... You talked a little bit about 2020. This year, they're still talking about very substantial growth. Next year, they're talking about even more growth, and by 2020, they're talking about a doubling in sales, so not many biotech companies give you that kind of insight into the future prospects, and that's probably why their investors are bidding it up a little bit more than they would be Biogen.

Harjes: Yeah. I just feel a whole lot more confident with Celgene, looking at their future in the next five years or so. They've laid it out. It's very clear. You don't have a whole lot of guesswork to do.

Kristine Harjes has no position in any stocks mentioned. Todd Campbell owns shares of Celgene. The Motley Fool owns shares of and recommends Biogen and Celgene. The Motley Fool has the following options: short October 2016 $95 puts on Celgene. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.