Biotechnology stocks have had an extremely solid first half of the year. The analysts at Cowen Group point out that expectations are very high and many of the stocks have already made big moves. Biotech stocks have performed in line or better than the broader market for each of the past 10 quarters, beating the S&P 500 by 59% over that time, with the average leading price-to-earnings (P/E) multiple expanding from 15 to 20 times earnings. Yet interest in the group remains high, and it is focused on fundamentally strong growth stories as opposed to attractive valuations. Cowen has a solid list of names to buy that could beat earnings expectations.
Acorda Therapeutics Inc. (NASDAQ: ACOR) announced yesterday it has acquired two neuropathic pain management assets from NeurogesX. Qutenza is approved by the U.S. Food and Drug Administration (FDA) for the management of neuropathic pain associated with postherpetic neuralgia. The company also acquired NP-1998, a phase 3 ready, prescription strength capsaicin topical solution, being assessed for the treatment of neuropathic pain. The Cowen price target for the stock is $37.73. The Thomson/First Call estimate is higher at $40.
Aegerion Pharmaceuticals Inc. (NASDAQ: AEGR) engages in the development and commercialization of novel therapeutics to treat debilitating and fatal rare diseases in the United States. It specializes in orphan drugs that in some cases often require less strenuous testing by the FDA. Cowen has an $83.50 price target and the consensus estimate is at $85.50.
Alexion Pharmaceuticals Inc. (NASDAQ: ALXN) is also an orphan drug developer. The company has one approved FDA drug called Soliris. The drug commands an incredible $400,000 for a year of patient treatment. It is important to note that one-drug biotech companies come with a lot of extra risks that diversified biotech companies do not possess, and Alexion certainly is not cheap at 64 times trailing earnings. Cowen has a $115 price target for the stock, while the consensus target is $120.
Ariad Pharmaceuticals Inc. (NASDAQ: ARIA) may be an acquisition target. The company has a newly approved blood-cancer drug called Islusig, which analysts believe could produce peak sales of $2.5 billion annually. Cowen has put a $27.40 target on the stock, and the consensus is in line at $28.
Cadence Pharmaceuticals Inc. (NASDAQ: CADX) focuses on acquiring, in-licensing, developing and commercializing proprietary product candidates for use in the hospital setting primarily in the United States and Canada. The company holds the rights to OFIRMEV injection, a proprietary intravenous formulation of acetaminophen for the management of mild to moderate pain, moderate to severe pain with adjunctive opioid analgesics, and the reduction of fever in adults and children. The Cowen price target for this small cap name is $7.36, and the consensus target is $8.
Exelixis Inc. (NASDAQ: EXEL) is another small cap name that could surprise to the upside. Back in May the company initiated Phase 3 trials on its drug Cabozantinib for patients suffering from metastatic renal cell carcinoma. Cowen did not have a posted target in its recent report. The consensus target is $5.
Hyperion Therapeutics Inc. (NASDAQ: HPTX) has been making solid acquisition for growth. Last year, Hyperion acquired worldwide rights to Ravicti, from Ucyclyd for an upfront payment of $6 million, future payments based on the achievement of regulatory milestones in indications other than UCD, sales milestones and mid-to-high single-digit royalties on global net sales of Ravicti. The Cowen target for the stock is $31.78, while the consensus target is $30.
Vertex Pharmaceuticals Inc. (NASDAQ: VRTX) announced in February plans to conduct phase 3 studies to test its drug VX-809 combined with another drug, Ivacaftor. These two drugs cure cystic fibrosis, a life-shortening disease that causes lung dysfunction. The Cowen price objective for this top name is $80.48, but the consensus target is higher at $92.50.
The Cowen research indicates biotech’s performance does not necessarily cool off during the summer months, and that the industry will shake off any idiosyncratic stock blow ups. However, biotech is high beta, and the rally likely will end if the broader markets roll over. Investors need to remember the high risk-reward correlation of biotech stocks and buy accordingly.