Needless to say, the past two years have been rough on biotech. So rough in fact, that a basket of the largest capitalization stocks now trades with a price-to-earnings growth figure that is in line with the S&P 500 and large cap pharmaceuticals. That is an extraordinary figure when you consider the growth rate comparisons. The question for investors is which stocks are the ones that hold the best potential in 2017.
A new Jefferies research report makes the case that the path this year won’t be that much easier than in years past:
Following a volatile 2 years, biotech seeks to achieve greater equilibrium. Competition is increasing, volumes slowing, and payer leverage ramping, and such headwinds to long term growth keep us selective in 2017 and beyond. Still, we see a stabilizing political backdrop and increasingly pro-industry regulatory environment offsetting some of the negativity, and believe an uptick in mergers and acquisitions should catalyze momentum particularly for mid-caps and help improve mixed sentiment.
Six stocks are listed as Buy rated, but here we focus on five with larger market caps.
This is a top large cap pick with big upside potential. 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. Otezla, which treats psoriasis and psoriatic arthritis, had achieved considerable prescriptions among physicians, but the scripts have slowed after a solid launch, showing the importance for sales outside of the United States.
Celgene’s 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. Wall Street analysts have noted that the company has discussed at its recent conference the benefits of longer duration Revlimid.
Celgene has a very compelling pipeline, and with four existing Phase 3 trial assets, that may add strong new drugs and revenue prior to the end of the decade.
Top Wall Street analysts feel that Celgene is best large cap, derisked growth story, with a possible 15% to 20% earnings growth over the next five years, two new growth drivers (two new oral pills for UC and Crohn’s) and a large pipeline of 25 or so partnerships of early-stage next-generation cancer drugs. So they feel it would not be surprising if the company were to remain a potential M&A target by big pharma, given it is the only large-cap growth story with visible growth over the next five years. Besides the significant pipeline, Celgene has high margins, and synergy with other major pharma players in cancer and immunology.
The Jefferies price target for the stock is $142, and the Wall Street consensus target is $138.29. Shares closed Monday at $120.21.
This stock is trading at an astounding multiple of less than seven times estimated 2016 estimated profits. Gilead Sciences Inc. (NASDAQ: GILD) discovers, develops and commercializes medicines in areas of unmet medical need in North America, South America, Europe and the Asia-Pacific. Its products include Stribild, Complera/Eviplera, Atripla, Truvada, Viread, Emtriva, Tybost and Vitekta for the treatment of human immunodeficiency virus (HIV) infection in adults; and Harvoni, Sovaldi, Viread and Hepsera products for the treatment of liver disease.
Gilead reported third-quarter total revenues of $7.5 billion, down year over year from $8.3 billion. Net income was $3.3 billion, or $2.49 per diluted share, compared to $4.6 billion, or $3.06 per diluted share, in the year-ago period. Non-GAAP net income, which excludes amounts related to acquisition-related, up-front collaboration, stock-based compensation and other expenses, was $3.7 billion, or $2.75 per diluted share, down from $4.8 billion, or $3.22 per diluted share. The company has also reiterated full year 2016 guidance.
The dividend yield is 2.48%. The $93 Jefferies price target is less than the consensus price objective of $95.29. The stock closed at $75.84.