6 Biotech and Biohealth Analyst Picks for 50% to 150% Upside

September 25, 2016 by Jon C. Ogg

The world of biotech and pharmaceuticals has entered into a strange period. The presidential elections have many companies under fire over price control or price gouging issues. And valuations previously had reached nosebleed levels prior to 2016. Still, investors know that a cure for cancer or a cure for rare and untreatable diseases is literally worth more than a gold mine.

24/7 Wall St. reviews dozens of analyst upgrades and downgrades each day of the week. This becomes hundreds of calls reviewed most weeks. It turns out that many of the upgrades and initiations are made in biotech, biohealth and emerging pharma companies. Some of these analyst calls also come with outrageous price targets — some ranging as much as 50% to 150% (or more).

The week of September 23 brought numerous analyst upgrades and downgrades in the biotech and biohealth space. Investors need to understand that analysts are far from omniscient. Analysts often get their upside wrong. Sometimes outside forces get in the way, and sometimes companies just do not deliver on their giant promises or indications. When biotechs go wrong, they often burn investors’ returns. Investors should only use analyst calls in the biotech and biohealth space as a starting point if they are not familiar with a company.

Again, there is no free lunch on analyst calls. If a Dow or S&P 500 stock is given 8% to 15% implied upside at this stage of the bull market, then projecting upside of 50% to 150% is taking a lot more risk — and a lot of good news may already be baked into that growth story.

Here are six analyst upgrades, initiations, and higher target prices for massive upside seen in analyst calls in the biotech and biohealth space from the week of September 23.

Achillion Pharmaceuticals

Wedbush Securities started Achillion Pharmaceuticals Inc. (NASDAQ: ACHN) with an Outperform rating and assigned a $13 price target on Friday, September 23. This was ahead of good news and compared with an $8.44 prior closing price, but Achillion closed up 3% at $8.69 on Friday. Its 4.65 million shares were more than three times normal trading volume. A post-news note from Wedbush said:

We reiterate our Outperform rating and $13 price target, based on a sum-of-parts analysis with an 8x multiple to estimated ACH-4471 peak revenues of $595M and $887M for PNH and C3G, respectively, discounted by 35% and a 15x multiple to worldwide HCV royalties of $110M, discounted by 30%.

Puma Biotechnology

On September 22, Puma Biotechnology Inc. (NASDAQ: PBYI) was reiterated as Outperform at Credit Suisse, but what stood out in this call was that the firm’s price target was raised sharply to $111 from $54. The firm’s higher target is based on increased Neratinib expectations, apparently much higher. The report said:

We view the FDA’s acceptance of neratinib’s NDA as a key de-risking event, further supported by management’s guidance that FDA’s 60-day letter indicated that no review issues have been identified at this time. … We anticipate a standard 10 months review period (management did not request priority review) with a July 2017 PDUFA date. Given HER2+ extended adjuvant is a new indication, we expect an ODAC panel, in line with management’s guidance.

Puma Biotech shares closed up 4.3% at $67.97 on Wednesday and were indicated up another 4.8% at $71.25 on Thursday after the call was made. They ended the week at $68.08, and the 52-week range is $19.74 to $94.93. Its consensus price target is $86.00. Keep in mind that this was a $200 or more stock in 2014 and 2015.

BioDelivery Sciences

Janney raised BioDelivery Sciences International Inc. (NASDAQ: BDSI) to Buy from Neutral with a $4 price target (versus a $2.45 prior close). Just do not overlook that management sold shares recently. The Janney report said:

Endo International has not yet announced, but clearly won preferred status for Belbuca relative to market leader Butrans on the Prescription Drug List at United Healthcare. … BDSI has announced five contract wins for Bunavail since July. This places BDSI on a path to show meaningful growth for Bunavail growth in 2017. As a result, our preliminary 2017 BDSI revenue estimate of $25 million shows significant improvement from our current 2016 estimate of $15 million. Based on the improved outlook we are raising our rating to Buy and maintaining our $4 fair value estimate.

BioDelivery Sciences shares closed up 10.2% at $2.70 on Friday. This call still implies right at 50% upside, even after Friday’s gain, and the 52-week range is $1.86 to $7.04.

Aviragen Therapeutics

On September 21, Ladenburg Thalmann started Aviragen Therapeutics Inc. (NASDAQ: AVIR) with a Buy rating and assigned it a $2.50 price target. The prior closing price was $1.60, and shares closed out the week at $1.66, in a 52-week range of $1.29 to $1.72.

H.C. Wainwright reiterated its Buy rating on Aviragen on September 20. The difference here is that this firm has a $5 price target. It sees upside coming as the SPIRITUS patient enrollment is 92% complete and on track to read-out at 2016 year-end. The firm also said that new Phase 1 bioavailability data supports additional vapendavir formulations, thereby allowing scaling up for Phase 3 trials. More positive points from this call were seen as follows:

New Phase 1 bioavailability data supports additional vapendavir formulations, thereby allowing scaling up for Phase 3 trials. … Aviragen anticipates to hold End-of-Phase 2 meetings with the FDA imminently after data read-out in preparation for the Phase 3 trials. … Next near-term catalyst is top-line data readout of Phase 2a RSV challenge study also at year end. … We see little read-throughs from Novavax’s trial. … Thirdly, enrollment of Phase 2 of BTA074 for condyloma continues.

BioTime

BioTime Inc. (NYSEMKT: BTX) was started with a Buy rating by Ladenburg Thalmann on September 23, but what stood out was the $6 price target. This represented implied upside of 67% from the $3.59 prior close if the report’s target is achieved.

BioTime shares closed up 5.8% at $3.80 on Friday, in a 52-week range of $2.02 to $4.51. Even after shares popped on the analyst call, it still had a market cap under $400 million.

Inotek Pharmaceuticals

A Buy rating for Inotek Pharmaceuticals Corp. (NASDAQ: ITEK) came from H.C. Wainwright on September 20. What stood out here was the $22 price target, representing close to 150% upside. Inotek’s share price went out at $8.76 on Friday, and it has a 52-week range of $5.81 to $13.36. That report said:

Our investment thesis hinges on the success of trabodenoson (and its second product, trabodenoson in combination with latanoprost, FDC), for glaucoma. Inotek has successfully completed Phase 2 (one in 2012; the second in 2015), it started the Phase 3 MATrX-1 monotherapy trial in September 2015, and started the Phase 2 combination study in July 2016. The first big data release should come from MATrX-1 in late 2016—what we see as the primary near-term stock driver.

Our $22 target is derived by a discounted P/E methodology and would be a 200% return from current levels. Even if we’re wrong about positive Phase 3 data, with $150 million in cash (including the recent convert) and only 27M shares, it leaves approximately $5.60 in cash value, compared to the current stock price of only $8.02. Hence we see Inotek as having a beneficial risk-reward profile.

I'm interested in the Newsletter
 

Just one final reminder: Just because analysts see huge upside targets in biotech stocks doesn’t mean that the upside thesis always plays out. And when these upside forecasts are wrong, they are often wrong with catastrophic losses.