By Johanna Bennett
Do you want safe, or sexy?
That’s the question facing biotechnology investors, according to a recent research note from Cowen analysts that previews the sector’s second-quarter financial results.
“In heady times, large cap provides a safe haven, smid caps the sex appeal,” reads the note.
After shrugging off a selloff in late June, the Nasdaq Biotechnology index has gained 30% since the start of 2015, and trades near all-time highs. The sector seems dividend between the earnings-driven large-cap names and the sexier small-and mid-cap names whose performance has been fueled by high-profile acquisitions and an uptick in IPOs.
We admit that rising small/mid-cap valuations, a less discriminating IPO window, and investor willingness to ascribe substantial value to earlier stage pipeline assets gives us some pause. Nonetheless, our universe still features multiple smid cap stocks that trade at a modest 1-2x multiple of their peak sales potential (CEMP, CLDX, DVAX, ITCI, OPHT, RLYP, SNSS). Moreover, the large cap, earnings-driven companies continue to trade on P/E multiples that appear reasonable if not conservative in relation to their growth prospects. Absent a major correction in the equity markets, we view the average biotech P/E multiple (~23X forward earnings) as sustainable and anticipate continued stock price performance in line with the considerable growth and upward earnings revisions that these stocks offer.
As for the second-quarter earnings seasons, Cowen’s analyst team expects estimate-beating results from Alexion Pharmaceuticals (ALXN), Amgen (AMGN), Anacor Pharmaceuticals (ANAC), BioMarin (BMRN), Gilead (GILD), Incyte (INCY), Regeneron (REGN), and Vertex (VRTX).
We think investors may be underestimating the impact that macro factors like Obamacare and an aging U.S. population are having on broader drug utilization. In addition, biotech has continued its tradition of enacting price increases on several key brands (Atripla, Enbrel, Otezla, Rituxan, Pomalyst, Revlimid, Tysabri, Xtandi). Furthermore, Q2 tends to be a seasonally strong period for biotech driven by factors that include more selling days, favorable wholesaler buying patterns, and a rebound in net pricing from Medicare patients. The only concerning macro trend has been Fx. Yet even that fear appears to have waned with most major currencies having stabilized or even gained versus the dollar over the past 2-3 months. Nonetheless, Q2 sales for companies with substantial un-hedged ex-U.S. sales (ALXN, BMRN, CELG, and VRTX) will see unfavorable Y/Y impact from foreign currency.
Originally posted here –