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Biotech’s Boom Might Be Back

29 October 2014 in Trading Ideas

More than three months ago, Federal Reserve Chairman Janet Yellen caught analysts and investors attention when she expressed during congressional testimony dismay at valuations of smaller firms in the social media and biotech sectors, saying that they appeared “stretched.”1

And to be fair, Yellen’s case looked much more on point as the market swooned into an autumn selloff, sparing no sector in the process.

However, at least where biotech stocks are concerned, most investors who sold at Yellen’s “call” would likely be disappointed. The Biotech Breakthroughs motif, for example, has gained 16.1% since Yellen’s speech on July 15. In that same time frame, the S&P 500 is essentially flat, off 0.1%.

So far this year, the motif has increased 24.5%; the S&P 500 has risen 7.9%.

Not everbody has been surprised at biotech’s bounceback, however. Two weeks ago, at what is now looking like the trough of the recent biotech selloff, analysts at both Nomura and UBS were pounding the table in support of many big biotech names.

Nomura analyst M. Ian Somaiya noted that October has historically been a weak month for biotech – in fact, the Nasdaq Biotechnology Index has underperformed the S&P 500 in 14 out of the last 20 years. As Somaiya wrote, “We believe the current biotech selloff is driven primarily by macro concerns rather than sector fundamentals.”2

Somiya said Nomura would advise taking advantage of the weakness by focusing on names with near-term catalysts to drive shares, since it didn’t project any clear winners in the third-quarter earnings season.

Among the Nomura recommendations were Celgene (an 11.7% weighting in the motif), which was set to present Phase II data on its Crohn’s disease drug that could potentially support $2.2 billion in worldwide peak sales; and Alexion Pharmaceuticals (a 4.7% weight), which Nomura cited for its unchanging tax guidance and lack of meaningful currency exposure that addressed two concerns heading into the third quarter, while the continued strength of its aHUS rollout could provide upside.

Meanwhile, UBS correctly predicted that Amgen (17.1% weight) would beat earnings estimates, which it did this past Monday. The firm noted that despite disappointment this summer on a trial involving its Kyprolis drug, the stock eventually rebounded, while the company’s large pipeline combined with its acquisition of Onyx pharmaceutical last year, bodes well for the future. UBS also feels Amgen will benefit with much increased revenue from its new cholesterol drug Evolocumab.3

UBS was also expecting big things from Gilead Sciences (a 19.6% motif weight), which was reporting results late Tuesday. UBS raised its sales estimates for its Sovaldi drug to $3 billion for the quarter. In addition, it is also looking for positive data on the company’s Phase 3 HIV “TAF” (son-of-Viread) pivotal data, which could come as early as this month. Viread is Gilead’s hepatitis B and HIV drug, which will go off patent in 2018.

As Lee Jackson at 24/7 Wall St. noted, consensus earnings numbers for Gilead show a 55% compound annual growth rate going forward, while the stock is currently trading at 8.8 times 2016 earnings vs. its peers, which trade at 16.2 times.

That doesn’t prove any of these stocks are cheap, but it would be a stretch to say analysts are not satisfied with the recent performances of firms in this sector.

1Randall W. Forsyth, “Yellen Testimony: Social Media, Biotech Stocks ‘Stretched,'” barrons.com, July 15, 2014.

2Ben Levinsohn, “Buy These Five Beaten-Down Biotech Stocks, Nomura Says,” barrons.com, Oct. 16, 2014.

3Lee Jackson, “UBS Very Positive on Top Biotech Stocks Ahead of Earnings,” 247wallst.com, Oct. 13, 2014, http://247wallst.com/healthcare-business/2014/10/13/ubs-very-positive-on-top-biotech-stocks-ahead-of-earnings/, (accessed Oct. 27, 2014).