Regeneron Pharmaceuticals (REGN), Vertex Pharmaceuticals (VRTX) and Alexion Pharmaceuticals (ALXN) look likely to catch the next wave in biotech, an analyst said Friday, suggesting after two years of underperformance that the sector could be slated for a boom.
X But it won't be "value stocks" like Gilead Sciences (GILD), Amgen (AMGN) and Biogen (BIIB) driving the boom, Leerink analyst Geoffrey Porges told clients in a note.
"These large caps drag down the performance of the indexes and (exchange traded funds), but the growth stocks already seem to be capturing sustained new investor interest," he said. "Our advice to investors remains to identify and scrutinize evidence of competitive advantage and to look to management to maximize profitability of existing businesses first and foremost."
IBD's 431-company Biomed/Biotech industry group is up 10% for the first five months of 2017 after finishing 2016 down 25%. During the "boom years" of 2015 and 2014, the stocks tacked on 11% and 41% growth. The group closed down 0.9% on the stock market today.
Such is the pattern in the biotech market, Porges says. Typical corrections run two to three quarters, followed by two to three years of sideways performance. Today, much of the excitement of mid-2015 has dissipated, leaving shares 40% below their long-term median relative multiples.
Consensus expectations for biotech sales and profits have declined 14%-23% and 7%-12%, respectively, over the last two years.
But the signs are getting better, Porges said. First-quarter results yielded "a mixture of positive and negative results vs. (the) consensus, and prompted some additional negative revisions, but so far this quarter's estimates have been remarkably stable."
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Political pressure is also beginning to subside, he said. President Trump has promised to introduce a competitive system that would cut down on escalating drug prices. Meanwhile, the industry has seemingly begun to self-regulate on drug pricing.
There are exceptions. Biogen and Ionis Pharmaceuticals' (IONS) Spinraza, a spinal muscular atrophy drug, debuted this year at $125,000 per treatment, or $750,000 in the first year. Porges sees the $37,000 price tag for Regeneron and Sanofi's (SNY) eczema drug Dupixent and the $65,000 price for Roche's (RHHBY) multiple sclerosis drug Ocrevus as more reasonable.
"Furthermore, manufacturers of established brands are taking more modest price increases and fewer of them, and are adopting voluntary price-increase limits (which remain too high but are a step in the right direction)," Porges said.
Approvals — many on time and some earlier than expected — have accelerated this year at the Food and Drug Administration, after hitting a five-year low in 2016. So far this year, 20 drugs have grabbed FDA approval, matching the total for all of last year. Those labels also appear broader, meaning drugs could have greater use.
Porges sees a number of drug launches coming over the next 18 months that could outdo consensus views. Key among those are gene therapies for rare diseases, treatments for end-stage cancer, and therapies for severe diseases created via a process that harnesses RNA molecules to inhibit certain genes.
"This process finally validates all the capital that was invested in these remarkable technologies during the 'boom years' and had seeming headed for disappointment at many points during the bust of the last 24 months," Porges said.
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