How Earnings Will Dictate Biotech Sector's Fate in 2020

Health and Healthcare

Published: January 23, 2020 1:35 pm

Last Updated: January 30, 2020 10:47 am

So far in 2020, the overall sentiment in the market still seems good following a strong finish to 2019. This is especially true among biotechnology stocks. The biotechs experienced large gains in fourth-quarter, partially driven by Biogen’s aducanumab surprise, continued M&A and investors generally getting back into therapeutics after rotating out due partly over drug pricing/health care reform.

As a result, Credit Suisse believes that this round of quarterly biotech earnings could prove to be a catalyst for 2020.

While drug pricing concerns are not going away anytime soon in an election year, Credit Suisse thinks any substantial legislation is unlikely. The firm still gets the sense that biotech investors are cautious this year, with the election and broader macro concerns, but a strong earnings cycle (with good guidance) could help allay some fears.

Credit Suisse further detailed in its report:

We continue to believe that macro issues are unlikely to have material fundamental impact in the near-term. As a result, we remain positive on the sector with strong fundamentals and clear opportunities for outperformance that remain unchanged since 3Q19. We would expect better performance in 4Q19 given that many companies benefit from seasonality changes ahead of the traditionally lower 1Q sales as insurance plans change at year-end. Overall, the election may impact sentiment come 2H20 (with more rhetoric on drug pricing), but we believe biotech fundamentals will remain strong, driven by M&A, R&D productivity, and commercial execution.

The brokerage firm listed a few of the major companies that it is watching in this earnings season.

Credit Suisse noted that Vertex Pharmaceuticals Inc. (NASDAQ: VRTX) is well positioned for another beat and raise. For Vertex, the firm projects higher earnings per share (EPS) of $1.33 than the consensus of $1.19, and slightly above consensus revenues of $1.1 billion, versus $1.0 billion. The firm believes that recent Trikafta approval in the United States will add more patients to the mix.

Amgen Inc. (NASDAQ: AMGN) is well positioned as U.S. biosimilar commercialization ramps up. For Amgen, Credit Suisse is ahead of consensus expectations for fourth-quarter revenues at $6.1 billion, versus the consensus of $6.02 billion, and EPS of $3.43, compared with the consensus of $3.40. The firm went on to say:

We’ve seen signs of resilience in the base business led by Enbrel, which may be offset by underperformance in Repatha and Neulasta, and increased R&D due to Amgen’s advancing pipeline. We could see a softer guide for 2020, if the new CFO wants to give himself some runway for a beat-and-raise year.

Regeneron Pharmaceuticals Inc.’s (NASDAQ: REGN) Dupixent could drive upside in the fourth quarter. While Credit Suisse has already seen Eylea sales of $1.22 billion, it expects Dupixent also will outperform. The firm believes recent efforts by Sanofi and Regeneron to streamline the partnership could potentially yield greater cost savings and increased efficiencies.

Gilead Sciences Inc. (NASDAQ: GILD) is likely to miss on HIV revenues, according to Credit Suisse. The firm is below on HIV revenues at $4.02 billion (the consensus is $4.33 billion) as it thinks that consensus expectations underappreciate likely cannibalization of legacy HIV assets by Biktarvy. Absent a broader strategy to rejuvenate long-term growth, Credit Suisse expects share weakness assuming an HIV miss.