How Biotech and Big Pharma Have Upside Heading Into Earnings

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Biotech and many of the so-called Big Pharma have been duds in 2019. Despite many FDA approvals and some powerful mergers and royalty deals, the political pressure around drug pricing and toward universal health care is also coming at a time when the entire sector has to worry about similar exposure that some companies are facing due to the opioid crisis.

Biotech exchange-traded funds are up about 10% on average so far in 2019, but if you back out the gains made in the first week of the year, it would look as though nothing has happened since then. This is also a time when the S&P 500 was up 19% and the Nasdaq 100 was up about 25% year to date. This brings an incredible set up ahead of the big earnings reports over the next two weeks. It is important to consider that short sellers also have been active in the biotech space, at the same time that the pharmaceuticals have seen larger short interest as well.

Credit Suisse issued several positive calls in the biotech space on October 18, and Merrill Lynch issued an entire rerating of the biotech and pharma space with a transfer of coverage on October 17.

It is important for investors to keep in mind that analyst calls are just one step of many that can be used in evaluating potential investments, and there are many instances in which either analysts have no better information than the public or they are just wrong. Consensus references here are generally from the Refinitiv ratings service.

Credit Suisse now expects a solid quarter from continued execution out of the biotech firms. The firm sees upside opportunities despite the recent downturn in investor sentiment, with an increased focus on M&A being somewhat offset by increasing regulatory scrutiny of larger deals. The firm also noted that biotech by and large beat estimates across the board in revenue and earnings in the second quarter of 2019 and that there have been no significant recent fundamental industry changes that would suggest softness beyond quarterly seasonality.

According to the Credit Suisse report, Vertex Pharmaceuticals Inc. (NASDAQ: VRTX) and Neurocrine Biosciences Inc. (NASDAQ: NBIX) are well positioned ahead of the quarterly results. Merrill Lynch also was positive on Vertex by reinstating it with a Buy rating with a $220 price objective. Credit Suisse’s call on Vertex calls for earnings of $1.23 per share on revenues of $963 million, and the consensus estimates were listed as $1.15 per share and $951 million. Vertex was trading close to $178 a share at the end of the week, with a consensus target price of $216.40 and a 52-week trading range of $151.80 to $195.81.

Credit Suisse noted that Amgen Inc. (NASDAQ: AMGN) has a quarter that could be mixed, while Biogen Inc. (NASDAQ: BIIB) could face a more challenging quarter. At Merrill Lynch, Amgen was reinstated as Neutral with a $215 price objective, and Biogen was reinstated as Underperform with a $200 price objective.

Amgen was up less than 5% so far in 2019, and the $203 or so share price late in the week compares with a consensus target price of $216.00. Biogen has lost roughly one-fourth of its value in 2019, and its $225 price late in the week compares with a consensus target price of $253.65.

Merrill Lynch reinstated its Neutral rating on Gilead Sciences Inc. (NASDAQ: GILD) but reduced the price objective to $70 from $80. Gilead shares were up barely 4% year to date as of Friday, and the $65 price was in a 52-week range of $60.32 to $74.80. Its consensus analyst target is $79.97.

In the small to mid-cap biotechnology space, Credit Suisse generally expects that third-quarter earnings will be in line with consensus estimates across its coverage universe. It does still warn that there could be some volatility for its commercial names. This includes Insmed Inc. (NASDAQ: INSM), as it has gotten the most inbound interest from clients over what to expect with earnings. At over $17 a share, Insmed has a 52-week range of $11.31 to $33.13.

United Therapeutics Corp. (NASDAQ: UTHR) was noted positively at Credit Suisse, which suggested that upside to consensus earnings and revenues is possible for the third quarter.

Merrill Lynch reinstated coverage on the Big Pharma stocks as well: Merck & Co. (NYSE: MRK) with a Neutral rating and $90 price objective and Pfizer Inc. (NYSE: PFE) also as Neutral but with a $37 price objective. Merck was trading near $84 late in the week, and it was up just under 10% year to date. Pfizer was down over 15% this year to around $36.

Other Merrill Lynch calls on Thursday in the biotech and pharma space were shown below.

  • Alexion Pharmaceuticals Inc.’s (NASDAQ: ALXN) target cut from $166 to $130. This was after Alexion may have made a stellar acquisition without having to pay full price for all the potential upside without knowing the outcome.
  • BioMarin Pharmaceutical Inc. (NASDAQ: BMRN) reinstated as Buy with a $90 price objective. At almost $70 a share late on Friday after a 2.8% gain, it had a consensus target price of $117.59.
  • Eli Lilly and Co. (NYSE: LLY) reinstated as Buy with a $133 price objective. Shares were trading above $108 late Friday, in a 52-week range of $104.17 to $132.13 and with a consensus target price of $125.33.

While analyst calls might not be a universal victory or loss ahead of time, Johnson & Johnson (NYSE: JNJ) managed to do quite well on its earnings report. Its shares had been up about 5% from Monday’s early trading, but a loss of 3.3% in midday trading on Friday had those shares back below $132 due to a recall showing that a single lot of its baby powder showed traces of chrysotile asbestos when tested.

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