US investors double down on biotech bets
By Eric Platt, Financial Times – 01/23/2015
Investors in US equities confronted with a volatile market so far this month are returning to one of their favoured trades of recent years: betting on biotech.
Having risen 100 per cent over the preceding two years, biotechs have maintained their ability to outperform the broad S&P 500 (.SPX) Already this month the Nasdaq biotech index (.NBI) has risen 5.7 per cent, rebounding from a sell-off during December and adding more than $40bn to its market cap, compared with the broader S&P 500 which is little changed.
The leadership by biotechs reflects how companies in the sector sit at the cutting edge of potential medical and pharmaceutical breakthroughs, promising huge rewards for investors. In a low-growth environment biotechs are seen by investors as one of the few sectors that can deliver compelling opportunities.
After four years of double-digit gains for the sector and five years when it has finished ahead of the benchmark S&P 500, Wall Street believes the biotech boom can continue.
"We have witnessed significant innovation in the biotech industry over the early part of this decade, highlighted by cures in hepatitis C and transformative advances in prostate cancer, multiple sclerosis and numerous orphan diseases," said Geoffrey Meacham, an analyst with Barclays.
"Rather than signalling a period of innovation lag, we believe we are still in the early-to-middle innings of a wave of innovation."
The bank also expects brisk earnings growth and projects a 19 per cent rise in large-cap biotech earnings this year, compared with an 8 per cent advance by the S&P 500 and an 11 per cent rise by healthcare, given drug launches and a slate of trials.
But risks remain high, particularly for smaller companies awaiting data from trials and for looming drug launches. Goldman Sachs noted that expectations for some upcoming debuts varied greatly, which could present a hurdle for stocks. Forecasts for Vertex's much-anticipated cystic fibrosis treatment range between a low of $1.3bn and a high of $2.8bn in 2016, which could represent three-quarters of the company's overall sales.
The potential for lower payouts from pharmacy benefit managers and a rotation into other sectors of the market could also dent the biotech bull run.
"Any sector that has had a three year-plus run like biotech, the risk grows as correlations between stocks grow," says Matthew Harrison, an analyst with Morgan Stanley. "A speed bump for one of the major biotechs appears to have significant sector implications."
Market valuations of three stalwarts of the industry — Biogen Idec (BIIB), Gilead (GILD) and Regeneron (REGN) — have more than doubled over the past two years. New treatments, including Gilead's blockbuster Sovaldi and Harvoni hepatitis C medications, have proved a fillip. Wall Street expects the latter to generate sales of $39.6bn between 2015 and 2017.
The soaring valuations of the largest biotech companies are not particularly troublesome, according to analysts with Barclays and Morgan Stanley, who point to metrics such as price/earnings and equity value-to-sales ratios. The Nasdaq biotech index trades with a p/e of 42.7 times expected 2015 results, below the 72.6 level recorded in 2012 but far above that of the S&P 500, data from Bloomberg show.
