In an almost incredible turn of events due to the massive selling among the biotechs, the four largest companies in the industry on a price-to-earnings multiple basis are actually cheaper than the S&P 500, despite higher growth, according to a new report from Jefferies. In fact, the IBB biotechnology index is now down 30% since mid-July, and the last time the index experienced a drop of 21% was the summer 2011.
With political rhetoric against drug prices increasing, and the volatility of a shaky overall market mixed in, the sector has been shellacked. Jefferies has four top picks for 2016. While they remain suitable for aggressive accounts, they all have substantial upside and may provide investors with solid alpha for 2016.
Jefferies is very bullish on this large cap biotech, though the stock is down a stunning 40% from highs that were printed in March of last year. Biogen Inc. (NASDAQ: BIIB) discovers, develops and delivers to patients worldwide innovative therapies for the treatment of neurodegenerative diseases, hematologic conditions and autoimmune disorders. Founded in 1978, Biogen is one of the world’s oldest independent biotechnology companies, and patients worldwide benefit from its leading multiple sclerosis (MS) and innovative hemophilia therapies.
Jefferies has acknowledged in the past that Biogen’s core multiple sclerosis drug market faces challenges going forward, with most diagnosed patients now treated, payers limiting net benefits from price increases and competing entrants expected. With those issues in mind Jefferies is still positive on Tysabri, especially for secondary-progressive multiple sclerosis, with upcoming clinical data a big factor.
Jefferies also feels that a combination of cost reductions in tandem with the still strong MS franchise, which may not be as challenged by competitors as some on Wall Street think, can help the company beat earnings estimates this year. With the strong pipeline, the stock is a solid choice for aggressive growth investors.
The Jefferies price target for the stock is $357, and the Thomson/First Call consensus target is even higher at $363.31. The stock closed Wednesday at $273.26, up over 5% after posting strong earnings.
Another one of Jefferies top biotech picks, the firm feels it has solid upside potential for 2016. 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.
Celgene provided strong guidance last year surrounding its Otezla launch and received encouraging feedback from doctors on the potential of new triplet regimens in myeloma. Analysts across Wall Street raised their estimates for the drug as, after more than a year on the market, this psoriasis and psoriatic arthritis treatment has achieved considerable prescriptions among physicians.
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. While third-quarter numbers were pretty much just in line, fourth-quarter revenue surged 23%.
The stock jumped recently when Celgene and Natco came to a patent settlement, which removes a huge, long-standing overhang on the stock. Revlimid makes up over 60% of the company’s total revenue, so having better clarity on the duration of its life cycle should continue to be a positive in 2016 and beyond. Plus some on Wall Street think that the terms of the settlement are incrementally more favorable than many expected.
Jefferies has a $149 price target. The consensus target is lower at $142.75. The shares closed Wednesday at $102.31.
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