Healthcare Business

Why Merrill Lynch Now Favors Large Cap Leaders in Biotech

Lee Jackson

Celgene

This large cap stock has solid upside potential for 2015 and next year, especially after the beating the biotechs have taken recently. Celgene Corp. (NASDAQ: CELG) has an outstanding partnered pipeline, which analysts think is low risk and has the potential to yield several blockbuster drugs . Some on Wall Street think that Celgene can grow earnings 15% on a compounded annual growth rate basis.

Celgene provided strong guidance earlier this year for its Otezla launch and encouraging feedback from doctors on the potential of new triplet regimens in myeloma. Analysts across Wall Street are raising their estimates for the drug as, after a little more than a year on the market, Otezla, which treats psoriasis and psoriatic arthritis, has achieved considerable popularity among physicians.

Celgene’s blockbuster blood cancer drug Revlimid continues to dominate. Pomalyst sales grew nearly 46% year over year last quarter. Cancer drug Abraxane also is growing at a respectable rate, so the company continues to have a strong lineup of top-selling drugs. While second-quarter numbers were solid, the third quarter and the rest of the year could prove to be better.

The $155 Merrill Lynch price target is well above the consensus target of $148.88. Shares closed on Tuesday at $112.19.

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Incyte

This company also is often 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 a 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 see it as a key player in the cancer space.

Wall Street is very positive on the potential for Jakafi, a first-in-class JAK1/JAK2 inhibitor approved by the FDA for treatment of people with polycythemia vera who have had an inadequate response to or are intolerant of hydroxyurea. Jakafi is also indicated for treatment of people with intermediate or high-risk myelofibrosis (MF), including primary MF, post–polycythemia vera MF and post–essential thrombocythemia MF.

Wall Street is also very optimistic about Jakafi’s potential in solid tumors. They estimate a 70% likelihood of success in pancreatic cancer and still meaningful opportunity (30% to 40%) in other solid tumor settings, with potential for out-year U.S. sales to be boosted a whopping 50% or more. Pivotal data from the JANUS studies are expected in 2016.

The Merrill Lynch price target is $145, and the consensus target is $126.25. The shares closed most recently at $112.46.

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Biotech investing is for aggressive accounts. But these four top large cap names are very good bets for investors looking to add high-quality companies with less volatility and binary clinical data risk.