Health and Healthcare

The Big Biotech Winners and Losers for 2013 (AMGN, BIIB, CELG, GILD, ALXN, ARIA, CBST, INCY, JAZZ, MDVN, ONXX, THRX, VPHM, VVUS)

Big biotech had a stellar 2012. In 2013, though, the large biotech companies may be dwarfed in performance by the smaller players in the $1 billion to $5 billion range. If you look at the gains of just the big three in biotech you will be shocked: Amgen Inc. (NASDAQ: AMGN), Biogen Idec Inc. (NASDAQ: BIIB) and Gilead Sciences Inc. (NASDAQ: GILD) created a whopping $60 billion in combined shareholder gains in 2012. We recently highlighted these big-cap biotechs as being overvalued, although there could be an ongoing Celgene-effect, as we already have seen several analysts increase their targets and opinion on Celgene Corp. (NASDAQ: CELG) after the company issued its longer-term guidance on Monday.

In late-December, 24/7 Wall St. stated that the risk-reward analysis for the large biotechs was too narrow for investors to chase. We maintain that stance because the larger biotechs still offer less than 10% upside on average. Note that Biogen Idec Inc. (NASDAQ: BIIB) recently has pulled back on a disappointing ALS study, and that at least brings a bit of cushion. Also, Amgen Inc. (NASDAQ: AMGN) just lowered earnings expectations due to an R&D tax credit moving forward. Our interest lies in what is in store for 2013, and that is in the mid-cap sector.

We screened out most of the companies that were less than $1 billion in market value and that were thinly traded. Many of those small-cap stocks offer the most upside for speculative investors, but they also bring the largest risks to portfolios. In general, most of these offer upside of 20% or more (with some much more).

Our list of biotechs with the most upside in 2013 is as follows: Alexion Pharmaceuticals Inc. (NASDAQ: ALXN), Ariad Pharmaceuticals Inc. (NASDAQ: ARIA), Cubist Pharmaceuticals Inc. (NASDAQ: CBST), Incyte Corp. (NASDAQ: INCY), Jazz Pharmaceuticals PLC (NASDAQ: JAZZ), Medivation Inc. (NASDAQ: MDVN), Onyx Pharmaceuticals Inc. (NASDAQ: ONXX), Theravance Inc. (NASDAQ: THRX), ViroPharma Inc. (NASDAQ: VPHM) and VIVUS Inc. (NASDAQ: VVUS). These stocks are in alphabetical order.

A driving force behind emerging pharma and biotech stocks in 2012 was M&A activity. We expect this to continue in 2013 as big pharma and large biotech companies should continue to spend billions of dollars to acquire new drug pipelines and R&D efforts. Some of these companies may easily fit the bill as potential M&A candidates in 2013 or beyond. That being said, 24/7 Wall St. has tried to avoid including most of the current or past buyout rumors that have surrounded some of these companies. We are looking to evaluate each of these companies based on the underlying fundamentals and expectations based on the facts and base-case outlooks rather than on hope.

All estimates have come from Thomson Reuters, but remember that these estimates can and likely will change through time.

Alexion Pharmaceuticals Inc. (NASDAQ: ALXN)
> Share price: $97.00
> Market value: $18.8 billion

Alexion actually did not make the screen the first time in December, but that was solely because of its share price and estimates at the time. It is the largest by market cap of our upside stocks in biotech for 2013, but the $97 share price and $120.26 consensus price target implies upside of about 24% in the next 12 months. Last year Alexion crossed over the $1 billion mark in revenues, and sales are expected to grow about 31% in 2013 to almost $1.5 billion. Its earnings estimate of $2.80 per share for 2013 gives it a forward P/E ratio of almost 35. Janney gave it a cautious Neutral rating at the start of 2013, but the stock was resumed with a Buy rating in December by Goldman Sachs after the company reported that its large U.K. PNH study showed significant clinical benefits were sustained over 10 years in the rare blood disorder called paroxysmal nocturnal hemoglobinuria.

Ariad Pharmaceuticals Inc. (NASDAQ: ARIA)
> Share price: $18.90
> Market value: $3.17 billion

Ariad’s consensus price target is $28.39 and its 52-week trading range is $13.42 to $25.40. If the consensus target is right, this implies 50% upside over the next year. Ariad may be an exception to the rule of screening out the implosions in price, because this one did take a big hit in December. That upside price target has come down, and we would expect it to come down a bit more as analysts adjust their price targets. Ariad has been public since the mid-1990s, and shares recently traded at all-time highs before the sell-off. This oncology-focused player had its expectations lowered by Jefferies due to drug safety issues, and the target is now $23 there. The stock also took a hit early in 2013 after showing that it will collaborate on its SPIRIT 3 clinical study for leukemia with Newcastle University. Ariad intends to market ponatinib beyond Europe and the United States, and in 2012 it began phase I/II clinical trials with ponatinib in Japan. The FDA’s response should be out by the end of March in 2013, so there is a big make or break ahead.

Cubist Pharmaceuticals Inc. (NASDAQ: CBST)
> Share price: $43.88
> Market value $2.82 billion

Cubist’s consensus price target is $51.58 and its 52-week trading range is $36.73 to $49.86. If the consensus target holds up, this implies almost 20% upside over the next year. Cubist took years to live up to our expectations, but now things may have stalled again. We originally expected a larger biotech or pharma player to acquire this company, but now there is an indication that Cubist may be an acquirer to live up to its longer-term sales goals. Cubicin is now well-received and its fight against hospital-acquired infections is a success, along with other products. This company has been public since the late-1990s. Earnings per share are expected to mildly contract in 2013, but the revenue growth expectations of almost 23% in 2012 are expected to rise another 11% to just over $1 billion in 2013. Cubist trades at about 22-times expected 2013 earnings.

Incyte Corp. (NASDAQ: INCY)
> Share price: $18.80
> Market value: $2.47 billion

Incyte’s consensus price target is $25.00 and its 52-week trading range is $14.06 to $26.30. If the consensus target is right, this implies upside of about 33% on top of the strong move this has enjoyed over the past month. Incyte is a riskier bet for upside in 2012 because its shares were slammed down to less than $18 from about $25 over the summer. While the stock has slid lower, the good news is that the chart has been shown twice to use just under $16 as support since that drop. The company’s Jakafi for myelofibrosis has been approved, but the fear now is that Gilead will be a strong competitor in cancers of the blood after an acquisition. Another concern is that Incyte has been public since before 1995 and its peak was way back in the year 2000, when shares were up above $100 for a very brief period. The expected sales growth for 2012 of about 185% to almost $270 million is expected to slow to sales growth of roughly 33% to about $360 million this year. The expected loss of $0.32 per share for 2013 is versus an expected loss of $0.54 per share in 2012. Incyte remains a 2014 to 2017 story, as Incyte has multiple products in its pipeline for cancer and inflammation in Phase I to Phase III studies.

Jazz Pharmaceuticals PLC (NASDAQ: JAZZ)
> Share price: $56.01
> Market value $3.24 billion

Jazz’s consensus price target is $69.60 and its 52-week trading range is $36.29 to $60.00. If the consensus target is right, this implies almost 30% upside over the next year, and that is after a gain of about 6% over the past month. Jazz already was having a decent 2012, but the real gains came from a major jump from $38 to $48 in early January of 2012 before basing out, followed by an even larger gain from $44 to $58 in September. The stock now has seemed to use $50 as a leveling off price on the chart. What really stands out in Jazz is that its shares were around $16 after its 2007 IPO but they slid down to under $1.00 during the height of the early 2009 panic selling. If any investor managed to catch the bottom and decided to hold on forever, this investment in Jazz makes Apple Inc. (NASDAQ: AAPL) look like child’s play. The expected sales gain of more than 100% in 2012 is expected to slow to a gain of 37% to $809 million in 2013. With earnings expected to grow from about $4.73 per share in 2012 to $5.67 in 2013, Jazz shares trade at just under 10-times its expected 2013 earnings. Maybe that massive run up has spooked some new investors, but on paper this one still looks cheap. Jazz has approved products for narcolepsy, psychiatry, pain and oncology. It also has four various pipeline candidates.

Medivation Inc. (NASDAQ: MDVN)
> Share price: $54.98
> Market value: $4.08 billion

Medivation’s consensus price target is $67.53 and its 52-week trading range is $22.46 to $58.83. If the consensus target is right, this implies 23% upside over the next year. After an expected sales gain of close to 200% to about $174 million in 2012, the sales expectation is for about 17% growth to almost $205 million in 2013. Unfortunately, the loss is expected to widen out to $0.89 per share in 2013, versus a $0.65 per share loss expected in 2012. Since shares have more than doubled in 2012 to all-time highs, and with this having been public since the late 1990s, some investors may feel as though the big gains have been seen here. The big development was XTANDI getting approved in 2012 for the treatment of metastatic castration-resistant prostate cancer for those who have been previously treated with Docetaxel. Medivation’s Enzalutamide, in collaboration with Astellas, is in various phases of study for prostate cancer and breast cancer.

Onyx Pharmaceuticals Inc. (NASDAQ: ONXX)
> Share price: $80.83
> Market value: $5.43 billion

Onyx is off to a strong start in 2013 with gains of nearly 10%. Its consensus price target of $100.76 implies upside of about 22%. We would note that the 52-week trading range is $35.73 to $93.18, so that analyst target price is about 10% above its 52-week and all-time high. Shares recently hit an all-time high, and Onyx has been public since 1996. Onyx shares have risen handily in 2012 versus prior years, but the expectation is that 2012 sales will be down 23% to $344.5 million. The trick is that sales are expected to grow by more than 50% in 2013 to almost $540 million. Unfortunately, the positive earnings of 2011 are expected to be followed by losses in 2012 and in 2013. Even if the consensus price target of almost $101 seems high, UBS started coverage with a Buy rating and a $97 price target in December. Onyx’s Nexavar and Kyprolis are for cancer treatments already, but the company is looking for expanded uses. Onyx also has a clinical development pact with Pfizer Co. (NYSE: PFE) in Phase II studies.

Theravance Inc. (NASDAQ: THRX)
> Share price: $21.72
> Market value: $2.13 billion

Theravance’s consensus price target is $30.33 and its 52-week trading range is $12.91 to $31.87. If the consensus target is right, then there is close to 35% upside over the next year. Theravance remains unknown to many investors. Its revenues are spotty, with expectations of $133.7 million in 2012 and it is expected to drop to $40.7 million in 2013. The company’s VIBATIV is a competing treatment for Cubist’s Cubicin against MRSA. The product pipeline is the real story here, with targets against respiratory issues, bacterial infections, central nervous system and pain management, and gastrointestinal motility dysfunction. This stock has pulled back and has now settled in the low-$20s, but its true peak was around $35 back in 2007. With analysts still expecting losses for the foreseeable future, Theravance remains a pipeline story rather than a product story.

ViroPharma Inc. (NASDAQ: VPHM)
> Share price: $25.10
> Market value: $1.65 billion

ViroPharma’s consensus price target is $34.77 and its 52-week trading range is $19.02 to $33.17. If the consensus target is right, this implies more than 38% upside over the next year. Cinryze for the treatment of Hereditary Angioedema is the focus right now, after getting approved in Europe and after having been approved by the U.S. Food and Drug Administration. It also has Vancocin for the treatment of clostridium difficile and Buccolam to treat seizures, both approved in the United States. The next big hope here is Plenadren for the treatment of adrenal insufficiency in adults, which could be a huge win if it lives up to expectations. ViroPharma shares have been much higher lately than they are now, but this is up from the depths of panic from 2003 to 2005 when it had a questionable future. Sales are expected to be down about 20% in 2012, but growing by almost 10% in 2013 to $467.5 million. Unfortunately this is a 2014 to 2017 recovery, because ViroPharma’s valuation is now about 65-times its expected 2013 earnings.

VIVUS Inc. (NASDAQ: VVUS)
> Share price: $14.43
> Market value: $1.45 billion

VIVUS’s consensus price target is $23.89 and its 52-week trading range is $8.60 to $31.21. If the consensus target is right, this implies upside of more than 65% in the next year. VIVUS shares had come way down, but more positive obesity sales data have added some support in the stock in December. The stock is also off to a good start in 2013 as well. VIVUS was identified as one of the obesity winners in our own internal outlook piece in December. This biotech has been public since before 1995, and its shares have enjoyed ups and downs the whole ride. In fact, its highs were back in the 1990s rather than of late. The consensus is still for a loss of $0.85 per share and only $138.4 million in revenue in 2013, but the obvious hope is that Qnexa has the potential to be a blockbuster drug.

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