Why Merrill Lynch Now Favors Large Cap Leaders in Biotech

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Since the peak of the biotech index in late July, the industry has dropped a staggering 24% through the end of the third quarter, versus the 10% drop in the S&P 500. There are numerous reasons why, not the least of which is populist political rhetoric calling for lower drug prices and more industry regulation. These things sound good to the masses but don’t take into account the huge research and development costs for drugs.

A new research piece from Merrill Lynch notes that when meeting with investors recently they seem concerned about headline risks for the duration of the election cycle as politicians know that the rhetoric resonates with voters. They say, given that scenario, to stay with large cap stocks with predictable growth and solid pipelines and catalyst potential.

The Merrill Lynch analysts have six stocks that fit the bill, and we focus on four that may have the biggest upside potential.

Alexion Pharmaceuticals

Rumors have flown for some time that this company may be a potential acquisition target, and in the spring it was the big buyer. Alexion Pharmaceuticals Inc. (NASDAQ: ALXN) bought Synageva Biopharma for a whopping $8.4 billion in cash and stock. That move added products and pipeline to compliment Soliris, the company’s only marketed product. Soliris is prescribed for the treatment of patients with myasthenia gravis, a rare neurological disorder that reportedly affects an estimated 13,600 people in the United States.

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While Soliris sales beat consensus estimates when Alexion reported second-quarter earnings, and 2015 revenue guidance was increased, it was below what some on Wall Street expected. Many analysts have pointed out that Alexion is no longer in what some term a “clinical data vacuum,” with plenty of late and intermediate stage clinical pipeline readouts in the next 12 to 18 months.

Merrill Lynch notes that researchers will present new data on the long-term efficacy and tolerability of Strensiq (asfotase alfa) in children with hypophosphatasia at the 2015 American Society for Bone and Mineral Research annual meeting being held in October.

The Merrill Lynch price target for the stock is $227. The Thomson/ First Call consensus price target is $225.33. The stock closed on Tuesday at $130.

BioMarin Pharmaceuticals

This is one of Wall Street’s favorites, and recently announced earnings were outstanding. BioMarin Pharmaceuticals Inc. (NASDAQ: BMRN) develops and commercializes innovative biopharmaceuticals for serious diseases and medical conditions. Its product portfolio comprises five approved products and multiple clinical and preclinical product candidates.

Over the past decade, BioMarin has become a top orphan drug company, and it looks poised to stay there. It is expected to post around $875 million in revenue this year and possibly $1.1 billion next year, following the approval of Vimizim, an enzyme replacement therapy for Morquio syndrome. BioMarin had raised its guidance for Vimizim to $200 million to $220 million from $170 million to $200 million.

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The company could have big readouts this year and expects continued solid performance from BioMarin’s marketed products. Many analysts eagerly await the drisapersen FDA Advisory Committee review later this year, with a decision expected on December 27. Most are handicapping about a 60% chance for approval. The company also received a favorable ruling from the patent trial and appeals board in the method of use patent application for drisapersen. This may block competition or force royalty payments.

The Merrill Lynch price target is $165. The consensus target is $160.65. Shares closed on Tuesday at $103.24.