Looking back at 2014, biotechs had a phenomenal year, and this looks to continue into 2015. The NYSE Arca Biotech index was up over 45% for 2014, and Wells Fargo expects that the biotech sector can make another strong push forward in 2015.
24/7 Wall St. had previously covered The Best Performing Biotech Stocks of 2014, where we highlighted seven stocks with a market cap over $300 million that had gained over 300% on the year, and surprisingly only one of those gainers was due to a buyout. Amazingly, some 28 biotech stocks in the same market cap range were up over 100% on the year.
Wells Fargo believes that the biotech sector will continue to attract high interest for 2015 due to its strong differentiated growth, which is mostly uncorrelated with macroeconomic variables. The price-to-earnings to growth multiples suggest that this growth is not fully accounted for in large-cap valuations relative to other sectors. Deep pipelines also offer potential for a few positive data surprises in 2015.
On the other side of the coin, Wells Fargo’s investor survey suggested less potential for new money to flow into the sector and drive stock appreciation. Pricing and reimbursement concerns could arise as well. The survey also yielded multiple competitive data points to key biotech products this year that could highlight life-cycle and revenue sustainability risks.
The favorite large-cap biotech is Celgene Corp. (NASDAQ: CELG). It has premier growth prospects from its broad pipeline and multiple opportunities of Revlimid. Celgene is also on Wells Fargo’s Priority Stock List.
Other favorites in the large-cap arena are Gilead Sciences Inc. (NASDAQ: GILD) and Biogen Idec Inc. (NASDAQ: BIIB). Compared to last year, Gilead has a less optimal setup and a growing competition, which is currently fueling reimbursement concerns. Although its shares look meaningfully undervalued on a direct cash flow basis, Wells Fargo views Biogen as an interesting trade into what the firm believes will be a well-received fourth quarter and 2015 guidance.
For 2015, Wells Fargo has BioMarin Pharmaceutical Inc. (NASDAQ: BMRN) picked as its favorite mid-cap biotech, and it considers the unmet need, science, mechanism and market opportunities for pipeline programs with key events this year not baked into the valuation yet.
Pharmacyclics Inc. (NASDAQ: PCYC) is another favorite mid-cap, and it is seen as undervalued with continued scrips growth. Also approval of the Kalydeco/’809 combo should highlight Vertex Pharmaceuticals Inc.’s (NASDAQ: VRTX) ability to capture this additional approximately $4 billion opportunity and shift it quickly to profitability and driving appreciation.
As for the small-caps, Xenoport, Inc. (NASDAQ: XNPT) tops Wells Fargo’s list due to its low-risk Phase 2 readout that is expected to highlight ‘829’s opportunity in psoriasis and multiple sclerosis. Objective responses and a continued clean CNS toxicity profile from CB-839 Phase 1 and 1(b) studies could potentially drive Calithera Biosciences Inc.’s (NASDAQ: CALA) upside throughout 2015. Strong U.S. Contrave scrips growth and an ex-U.S. partnership with a large pharma with an established metabolic franchise could help Orexigen Therapeutics Inc. (NASDAQ: OREX) shares break through $6.50 to 7.00 resistance.