With earnings season hitting its stride this week, many investors are looking to see how the companies they own perform. Two areas that have lagged all year long are biotech and pharmaceuticals. One of the biggest reason for the overall underperformance, health care is one of only two sectors in the S&P 500 that is down this year, is political rhetoric over drug prices. Toss in the end of the Pfizer-Allergan tax inversion deal, and the sentiment remains poor.
New research from Jefferies highlights this week’s top growth stock picks, and there is a clear bias for some top biotech and pharmaceutical stocks — and with good reason. They are cheap, and have solid upside potential. Jefferies featured three top companies in the report and all are rated Buy.
Insys Therapeutics
This was the target of a short-selling report near the end of last year and has still not recovered. Insys Therapeutics Inc. (NASDAQ: INSY) is a specialty pharmaceutical company that develops and commercializes innovative drugs and novel drug delivery systems of therapeutic molecules that improve the quality of life of patients.
Using proprietary sublingual spray technology and capabilities to develop pharmaceutical cannabinoids, Insys addresses the clinical shortcomings of existing commercial products. Insys currently markets two products: Subsys, which is sublingual Fentanyl spray for breakthrough cancer pain, and a generic version of Dronabinol (THC) capsules.
The company reported recently that Subsys first-quarter sales would be way below Jefferies and consensus estimates. The analysts now believe revenues will be flat to down. They note that the potential for Syndros approval is the next big catalyst, and the key will be the scheduling it receives. A top regulatory expert believes it will be a class 3, which will be a positive and can drive earnings growth.
The Jefferies price target is a modest $17, and the Thomson/First Call consensus target is much higher at $24.43. The share closed Friday at $14.32.
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Neurocrine Biosciences
This company has partnered with a top big pharmaceutical company and the data have been very solid. Neurocrine Biosciences Inc. (NASDAQ: NBIX) discovers and develops innovative and life-changing pharmaceuticals in diseases with high unmet medical needs, through its novel research and development platform, focused on neurological and endocrine based diseases and disorders.
The company’s two leading late-stage clinical programs are elagolix, a gonadotropin-releasing hormone antagonist for women’s health that is partnered with AbbVie, and valbenazine, a vesicular monoamine transporter 2 inhibitor for the treatment of movement disorders. Neurocrine intends to maintain certain commercial rights to its VMAT2 inhibitor for evolution into a fully integrated pharmaceutical company.
Jefferies recently hosted an investor event with an industry expect to discuss the KINECT 3 data. The expert believes that both valbenazine and competing company’s drug are superior to current standard of care. Both drugs offer safety advantages, but there is a debate about whether the drugs will have black box warnings, which the current drug does. The analysts feel that valbenazine is still on track for an NDA filing this year, and Jefferies sees a $1 billion potential for the drug.
Jefferies has a $60 price target, but the consensus target is even higher at $68.14. The stock closed Friday at $46.54.
Shire
This is one of the top picks on Wall Street in specialty pharma. Shire PLC (NASDAQ: SHPG) develops, licenses, manufactures, markets, distributes and sells pharmaceutical products. It offers various products for the treatment of attention deficit hyperactivity disorder. The company also focuses on the development of resources projects in various therapeutic areas, including rare diseases, neuroscience, ophthalmics, hematology and gastrointestinal disorders, as well as early development projects, primarily on rare diseases. Shire markets its products through wholesalers and pharmacies.
Many analysts were perplexed by the somewhat mixed market reaction to the Baxalta bid. Baxalta was spun off from Baxter last year, and the market correction in the fall provided investors a compelling opportunity to refocus on company’s true intrinsic value. The Baxalta acquisition could produce $13 billion in revenues for Shire’s rare disease portfolio by 2020, according to Bloomberg Intelligence analysis. Sales at the combined entity are projected to reach $20 billion.
Shire has continued to up the ante for Baxalta, and a deal was finally reached in January for a whopping $32 billion. The company is still working on the ability to put cash in the mix without triggering a hefty tax bill. Jefferies says the company is cheap, with or without Baxalta, and sees big earnings growth ahead. And the firm looks for value creating catalysts soon, notably potential Lifitegrast approval in July.
The $223 Jefferies price target is lower than the consensus target of $233.38. The shares closed Friday at $181.70.
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Two top biotechs and a leading specialty pharmaceutical, and all three make sense for aggressive growth portfolios. The aversion to the sector has made all three of these top companies very affordable at current levels.
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