A new Jefferies research report makes the case that the path this year won’t be that much easier than in years past:
Following a volatile 2 years, biotech seeks to achieve greater equilibrium. Competition is increasing, volumes slowing, and payer leverage ramping, and such headwinds to long term growth keep us selective in 2017 and beyond. Still, we see a stabilizing political backdrop and increasingly pro-industry regulatory environment offsetting some of the negativity, and believe an uptick in mergers and acquisitions should catalyze momentum particularly for mid-caps and help improve mixed sentiment.
Six stocks are listed as Buy rated, but here we focus on five with larger market caps.
This is a top large cap pick with big upside potential. Celgene Corp. (NASDAQ: CELG) has an outstanding partnered pipeline, which most think is low risk and has the potential to yield several blockbuster drugs. Certain Wall Street analysts also think the company can grow earnings 15% on a compounded annual growth rate basis going forward. Otezla, which treats psoriasis and psoriatic arthritis, had achieved considerable prescriptions among physicians, but the scripts have slowed after a solid launch, showing the importance for sales outside of the United States.
Celgene’s blockbuster blood cancer drug Revlimid continues to dominate. Pomalyst sales also continue to be solid. Cancer drug Abraxane is also growing at a respectable rate, so the company continues to have a strong lineup of top-selling drugs. Wall Street analysts have noted that the company has discussed at its recent conference the benefits of longer duration Revlimid.
Celgene has a very compelling pipeline, and with four existing Phase 3 trial assets, that may add strong new drugs and revenue prior to the end of the decade.
Top Wall Street analysts feel that Celgene is best large cap, derisked growth story, with a possible 15% to 20% earnings growth over the next five years, two new growth drivers (two new oral pills for UC and Crohn’s) and a large pipeline of 25 or so partnerships of early-stage next-generation cancer drugs. So they feel it would not be surprising if the company were to remain a potential M&A target by big pharma, given it is the only large-cap growth story with visible growth over the next five years. Besides the significant pipeline, Celgene has high margins, and synergy with other major pharma players in cancer and immunology.
The Jefferies price target for the stock is $142, and the Wall Street consensus target is $138.29. Shares closed Monday at $120.21.
This stock is trading at an astounding multiple of less than seven times estimated 2016 estimated profits. Gilead Sciences Inc. (NASDAQ: GILD) discovers, develops and commercializes medicines in areas of unmet medical need in North America, South America, Europe and the Asia-Pacific. Its products include Stribild, Complera/Eviplera, Atripla, Truvada, Viread, Emtriva, Tybost and Vitekta for the treatment of human immunodeficiency virus (HIV) infection in adults; and Harvoni, Sovaldi, Viread and Hepsera products for the treatment of liver disease.
Gilead reported third-quarter total revenues of $7.5 billion, down year over year from $8.3 billion. Net income was $3.3 billion, or $2.49 per diluted share, compared to $4.6 billion, or $3.06 per diluted share, in the year-ago period. Non-GAAP net income, which excludes amounts related to acquisition-related, up-front collaboration, stock-based compensation and other expenses, was $3.7 billion, or $2.75 per diluted share, down from $4.8 billion, or $3.22 per diluted share. The company has also reiterated full year 2016 guidance.
The dividend yield is 2.48%. The $93 Jefferies price target is less than the consensus price objective of $95.29. The stock closed at $75.84.
This is another top mid-cap rumored to be in the sights of a larger biotech company. Incyte Corp. (NASDAQ: INCY) has a current validated approach in hematology-oncology, and there’s reason to believe the three wholly owned clinical-stage assets the company has could drive several billion in revenue, something important for an acquiring company looking to acquire assets. Many on Wall Street are bullish on the company’s rich pipeline of small molecule therapies in all stages of development, and they see the company as a key player in the cancer space.
Incyte focuses on the discovery, development and commercialization of proprietary therapeutics in oncology. It offers Jakafi for the treatment of myelofibrosis and polycythemia vera cancers. Its clinical stage products include ruxolitinib cream, which is in Phase 2 clinical trial for the treatment of alopecia areata; and INCB52793, which is in Phase 1/2 for the treatment of advanced malignancies. The company’s clinical stage products also comprise baricitinib, which is in Phase 3 trial for rheumatoid arthritis, as well as a completed Phase 2 trial for psoriasis and diabetic nephropathy.
The Jefferies price target is $118, while the consensus price objective is $110.21. Shares closed at $118.52.
Analysts also feel good about this top biotech now. Vanda Pharmaceuticals Inc. (NASDAQ: VNDA) focuses on the development and commercialization of products for the treatment of central nervous system disorders. The company’s marketed products include Hetlioz (tasimelteon), a product for the treatment of non-24-hour sleep-wake disorder, and Fanapt (iloperidone), a product for the treatment of schizophrenia.
The company’s clinical development products include tradipitant (VLY-686), a small molecule neurokinin-1 receptor antagonist that is under the clinical development for the treatment of chronic pruritus in atopic dermatitis; Trichostatin A, a small molecule histone deacetylase inhibitor; and AQW051, a Phase 2 alpha-7 nicotinic acetylcholine receptor partial agonist.
Jefferies noted in the fall when it assumed coverage of the stock that it believes the Hetlioz program would ramp from, and four key Phase 2 and Phase 3 studies are expected to report results in 2017.
The $23 Jefferies price target is near the consensus target of $22.50. Shares closed on Monday at $14.70.
This one has long been considered a buyout candidate. Vertex Pharmaceuticals Inc. (NASDAQ: VRTX) engages in discovering, developing, manufacturing and commercializing small molecule drugs for patients with serious diseases in specialty markets. The company focuses on developing and commercializing therapies for the treatment of cystic fibrosis (CF) and hepatitis C.
Wall Street as a whole has long been very positive on the stock, and some have indicated that the company could have as much as $10 in potential earnings-per-share power. The consensus also expect that Vertex should receive FDA approval for the company’s CF drug Lumacaftor, or as it is known, VX-‘809, which some think could generate billions in revenues.
Its big catalyst for Phase 2 “triple data” in cystic fibrosis could have results in the fall of this year Some feel that the company has a potential parabolic earnings curve and profitability that could go from $0 in per-share earnings to $5 or more in a few years, and two new next generation correctors in Phase 2 as a “triple pill,” which could add $1 billion to 2 billion more down the road from the “hetero” market. In addition, many top analysts feel the company has a fairly good chance that the Phase 3 “triple” will work in the second half of 2017 — a new growth driver with data coming.
Jefferies has a $104 price target. The consensus target is $100.10. Shares closed yesterday at $82.86.
It goes without saying that these stocks have the potential for not only big upside, but big volatility. They are only suitable for accounts that have very high risk tolerance. With that in mind, they also run the gamut for investors in terms of potential and offer solid alpha if things fall into place.