Biotech Values

[Titan V]

Biotech 2017: 4 Ideas for A Stockpicker’s Year
http://blogs.barrons.com/focusonfunds/2017/02/17/biotech-2017-4-ideas-for-a-stockpickers-year/

So far this year nearly $190 million has flowed out of biotechnology exchange-traded funds. If flows tell a story about how investors feel, this one isn’t very good.
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However, RBC Capital Markets Michael Yee says the firm’s outlook on biotech is “fundamentally positive,” but that it may be a stockpicker’s year considering the mixed-bag of drivers and ongoing uncertainty. He thinks the sector could move in a general 10%-15% trading band as earnings grow and stocks see some minor PE expansion. There is a potential for those stocks to break out in the second half of the year as the M&A picture gets clearer.
In the near-term, Yee says, politics may get in the way and continue to fuel a volatile environment for healthcare stocks, despite reasonable fundamentals and cheap valuations. Biotech’s price-to-earnings ratio at 14x is near 10-year lows and remains below the S&P 500's and pharmaceuticals’ valuations.

M&A will be an important trigger, but there were 150 IPOs in 2012-2015, and if the capital-raising environment is not conducive to consolidation, then stock prices may suffer and the market will know they need to raise money.

Yee’s large-company picks below:

Celgene (CELG): Yee wrote that it is the “best and cleanest large-cap de-risked growth story.” The company’s earnings growth is expected to be in the 15%-20% range. Two new oral pills and a large pipeline of more than 25 partnerships in early-stage next-gen cancer drugs should help.


Biogen (BIIB): Shares are “fundamentally undervalued” and its pipeline is not being given enough credit, wrote Yee. The most upside versus downside is its Alzheimer’s program. Its Spinraza approval and launch in the next year is a positive. Biogen is also a favored acquisition target as many big companies are interested in core business ynergies and big pipelines.

Vertex Pharmaceuticals (VRTX): The company, known for its cystic fibrosis treatment, took a big hit last year due to a number of reasons. Shares dropped 42% in 2016, and recently traded at around $88. Yee notes that the company has a parabolic earnings curve coming as it goes from $0 in earnings to $5 in a few years. Upcoming phase III data on its VX-661 should be a catalyst. Yee also sees promise in its combination treatments.

Biomarin Pharmaceutical (BMRN): Yee says the company’s phase I gene therapy hemophilia program is showing positive data. He sees a high likelihood of the company being acquired this year or next as they become profitable; it has a $1.5 billion commercial business and a large pipeline.