Anybody that has been long the biotechnology sector for the past four years has had outstanding returns. Following four straight years of outperformance against the S&P 500, investor interest in the sector has broadened and expectations are more commensurate with what the biotechnology analysts at Cowen view as the group’s strong fundamentals. They strongly favor companies with real businesses or underappreciated late stage products.
The question for investors is simple. Is it too late to get involved after such a gigantic move? While the sector’s fundamentals appear favorable on several fronts (promising new product cycles, open U.S. pricing environment, cooperative FDA, steady mergers and acquisitions activity), in Cowen’s view the biggest driver of outperformance has been biotech’s strong earnings visibility relative to other sectors. The firm’s historical analyses indicate a strong positive bias to biotech earnings revisions, and it expects more of the same in 2014 as nearly every large cap company appears poised to beat and raise. Bottom line: investors may be late to the game, but better late than never.
Here are some of the top biotech names to buy at Cowen. They presented such an extensive list that we focused on the quality large cap names and the stocks with the highest upside to their target price objectives.
Acorda Therapeutics Inc. (NASDAQ: ACOR) top product is its FDA-approved drug Ampyra, which is designed to improve walking in patients with multiple sclerosis. The company has two additional FDA-approved drugs, but they contribute much less compared to Ampyra’s annual revenue. Acorda’s third-quarter report disappointed shareholders when the company tightened its full-year forecast for Ampyra sales to a range of $295 million t0 $305 million from prior guidance of $285 million to $315 million, even though organic growth in Ampyra sales rose by 13% through the first nine months of the year. The Cowen price target for the stock is $52. The Thomson/First Call estimate is $40.42. Shares closed Tuesday at $31.59. A move to the target would represent a 68% gain.
Amgen Inc. (NASDAQ AMGN) is one of the mega cap biotechs that Cowen thinks will handily beat this year’s earnings estimates. Over the past five years, the company has had free cash flow of at least $3 billion a year. Over the past decade, the company has grown after-tax profit by 14% compounded annually. Investors are even treated to a 2% dividend. The Cowen price target for the stock is $129, and the consensus number is set at $127.43. Amgen closed Tuesday at $119.25.
Biogen Idec Inc. (NASDAQ: BIIB) remains the top name in class and is an industry powerhouse. The Cowen research team points out that trading at just 20 times 2015 earnings, the stock is not overvalued. They also feel that it is a mega-cap biotech that can also beat this year’s earnings expectations. With an incredible portfolio and pipeline, Biogen Idec is a top portfolio holding for many mutual funds and hedge funds. The Cowen price target for the stock is set at $308, and the consensus figure is $306.19. Biogen Idec closed Tuesday at $310.50.
BioMarin Pharmaceutical Inc. (NASDAQ: BMRN) finally has begun to control its spiraling costs. The Cowen analysts feel that while BioMarin has an attractive pipeline, folks worry about management’s ability to control costs and allow the company to become sustainably profitable. The shares have doubled over the past year, and Cowen thinks that investors will demand cost controls from the company. The company announced that it has entered into an agreement to purchase Repligen’s histone deacetylase inhibitor (HDACi) library and related intellectual property. Potential applications of the HDACi portfolio include Friedreich’s ataxia and other neurological disorders. The Cowen price objective for the stock is $85, and the consensus number is posted at $80.43. BioMarin closed Tuesday at $73.98.
Celgene Corp. (NASDAQ: CELG) is another mega cap name to buy at Cowen. The big biotech recently presented results from an analysis that showed encouraging news for blockbuster drug Revlimid as a treatment for multiple myeloma. A combination of Revlimid and low-dose dexamethasone significantly improved overall survival and progression-free survival rates, leading some experts to conclude that the treatment probably now will become the new standard of care for the disease. Cowen has a $178 price target. The consensus target for the stock is $187.27. Celgene closed on Tuesday at $168.55.
Chimerix Inc.‘s (NASDAQ: CMRX) lead product candidate, brincidofovir (CMX001), is an oral nucleotide analog that has shown broad-spectrum antiviral activity against all five families of dsDNA viruses that affect humans, including cytomegalovirus (CMV), adenovirus (AdV), BK virus (BKV) and herpes simplex viruses. Brincidofovir has a favorable safety and tolerability profile, with no evidence of kidney or bone marrow toxicity in nearly 900 patients dosed with brincidofovir to date. The company was also added to the Nasdaq Biotechnology index last month. The Cowen price target for the stock is $27, and the consensus is higher at $29.25. Chimerix closed Tuesday at $19.60. A move to the target would be a 50% gain for shareholders.
Dynavax Technologies Corp. (NASDAQ: DVAX) could be the small cap home run that so many investors look for. The company is a clinical-stage biopharmaceutical company that discovers and develops novel products to prevent and treat infectious and inflammatory diseases. Its main product is Heplisav, which is meant to treat hepatitis B and is in phase III trials. The Cowen price target for the stock is an incredible $8, while the consensus is $4.50. Dynavax closed Tuesday at $1.96. A move to the target would be a gigantic 300% gain.
ImmunoGen Inc. (NASDAQ: IMGN) is focusing on breast cancer treatment with its targeted-antibody payload, or TAP, technology, which allows chemotherapy toxins to hop aboard an antibody and be released when they come into contact with a targeted cancer cell that exhibits a specific protein signature. The end result is the destruction of cancerous cells without harming healthy cells that do not possess this protein signature. The Cowen price target for the stock is set at $20. Consensus price target for this fast-rising name is $16.59. The stock closed at $16.86.
Nektar Therapeutics (NASDAQ: NKTR) is a top name to buy at Cowen for 2014. The company’s clinical pipeline and list of big pharma partners are impressive to say the least. Despite having a whopping eight late-stage candidates, Nektar’s market cap is a paltry $1.3 billion. Its top drug Naloxegol is being developed as a once-daily oral tablet for the treatment of opioid-induced constipation, and it is licensed out to AstraZeneca. Piper Jaffray confirmed last week that the FDA panel has switched the drug to the Anesthetic/Analgesic category. This could increase the probability of approval. Cutting to the chase, if the drug is approved next year, Nektar will receive up to $245 million in milestone payments — some of which has already been triggered by the filing of the NDA. Cowen has a $17 price target on the stock. The consensus price target for the stock is $14. Nektar closed Tuesday at $13.51.
Portola Pharmaceuticals Inc. (NASDAQ: PTLA) is a biopharmaceutical company focused on the development and commercialization of novel therapeutics in the areas of thrombosis and hematology. Portola’s wholly owned lead compound, betrixaban, is a novel, oral, once-daily Factor Xa inhibitor in phase III development for extended-duration prophylaxis of venous thromboembolism (VTE) in acute medically ill patients. Betrixaban’s properties may be uniquely suited to potentially demonstrate efficacy without significantly increasing bleeding in this patient population. Currently, there is no anticoagulant approved for extended-duration VTE prophylaxis in acute medically ill patients. Cowen has a $45 price objective, while the consensus number is set at $35.50. The stock closed Tuesday at $28.59. A move to the target would be almost a 60% gain for investors.
VIVUS Inc. (NASDAQ: VVUS) may have the safest of the three anti-obesity drugs that will be available. The Cowen surveys and channel checks with obesity physicians again point to Qsymia as being the most efficacious obesity agent among the three, and it has having an acceptable safety profile in patients (with the exception of women who are actively trying to get pregnant). The biggest issue for the drug has been the disastrous commercial strategy pioneered by the company’s prior management team. The Cowen price target for the stock is $19, and the consensus figure is at $11.50. The stock closed Tuesday at $8.84. A move to the target would be a 114% gain.
There are multiple risks that are inherent with an investment in the biotechnology sector. Beyond systemic risk, there is also clinical, regulatory and commercial risk. Additionally, biotechnology companies require significant amounts of capital in order
to develop their clinical programs. We have advised in the past that some of the lower priced small cap stocks are highly speculative, and not suitable for conservative accounts. It makes sense to have at least a small biotechnology allocation in most accounts, as the alpha provided can enhance overall portfolio performance.