The annual Cowen list of “Top 10 Potential Surprises” for the new year includes events that are (1) underappreciated by the investment community, (2) have at least some chance of occurring during 2014 and (3) would be associated with significant stock price ramifications. They rank in likelihood from #10 being the most likely to #1 being the least likely. Here are the top 10 potential surprises of 2014.
Surprise #10
The Cowen analysts think that at least one of Vertex Pharmaceuticals Inc. (NASDAQ: VRTX) VX-809 Phase III trials will fail. Vertex is well known for its hepatitis C drugs and is testing VX-809 for cystic fibrosis. While the analysts agree that VX-809’s Phase III trials are more likely to succeed than fail, they think there is still a meaningful chance that at least one of the trials fails to produce a statistically significant p-value on its primary endpoint of improvement in lung function. A failure could have a big effect on the stock price in the short term. Cowen has a 40% chance of probability. Vertex closed Wednesday at $68.63.
Surprise #9
Gilead Sciences Inc. (NASDAQ: GILD) historically has used its cash to buy back shares and acquire companies. Investors do not see Gilead changing its stripes any time soon. The Cowen team thinks that increased product sales will drive cash flow and the company will initiate a stock dividend for shareholders, which is uncommon for large biotech names. They would expect Gilead to continue to buy back shares, and the company has indicated it will still be active in business development. Nonetheless, it only makes sense to the Cowen team that Gilead will look at new ways to return cash to shareholders, with a dividend being an obvious alternative. Probability is posted at 30%. Gilead closed Wednesday at $73.59.
Surprise #8
More and more companies will go public in 2014. This year was a banner one for initial public offerings (IPOs). By Cowen’s count, 37 biotech companies debuted on the public markets, more than any year since 2000, when 63 companies went public. However, toward the latter part of 2013, IPO stock price performance waned, deal fatigue set in and several companies were forced to postpone their offerings. The Cowen team is pretty sure that with the Nasdaq trading close to all-time highs, the window for IPOs will open back up. They believe it is not unreasonable to assume that if the next round of IPOs is priced appropriately, they too will perform well and entice more capital back into the marketplace. The probability is set at 25%.
Surprise #7
After years of struggle, an obesity pill finally starts selling. The once-heralded pill to help end the obesity epidemic has struggled and traction has been poor. Nonetheless, Cowen believes that there is a chance that the second half of next year could
witness more substantial uptake of one or more obesity drugs. This would likely be driven by continued physician education and more patient-friendly reimbursement. They handicap the three players in the obesity arena.
Arena Pharmaceuticals Inc.’s (NASDAQ: ARNA) Belviq scripts have started to show signs of modest growth in the past few weeks, albeit starting from very small numbers. Partner Eisai recently announced that it will double its U.S. sales force from 200 to 400, and it has also left the door open for future expansions. Arena closed Wednesday at $5.58.
Orexigen Therapeutics Inc. (NASDAQ: OREX) is expected to have its obesity drug Contrave approved around June 2014 and to be on the market sometime in the third quarter of 2014. Contrave, in addition to its unique clinical profile targeting both overeating and depression, is the only one of the three obesity drugs that can be sampled, since it is not a scheduled drug. Orexigen closed Wednesday at $5.46.
VIVUS Inc. (NASDAQ: VVUS) may have the safest drug of the three. The Cowen surveys and channel checks with obesity physicians again point to Qsymia as being the most efficacious obesity agent among the three, and as having an acceptable safety profile in patients (with the exception of women who are actively trying to get pregnant). The biggest issue for the drug has been the disastrous commercial strategy pioneered by the company’s prior management team. VIVUS closed Wednesday at $9.38.
Cowen analysts think that the company that takes significant traction and market share in this field could have significant upside. They predict that an obesity winners stock could have 50% upside potential. They assign a 20% probability of that happening in 2014.
Surprise #6
BioMarin Pharmaceutical Inc. (NASDAQ: BMRN) finally begins to control its spiraling costs. The Cowen analysts feel that while BioMarin has an attractive pipeline, folks worry about management’s ability to control costs and allow the company to become sustainably profitable. The shares have doubled over the past year, and Cowen thinks that investors will demand cost controls from the company. The company’s spending has become a larger and larger focus, and in fact, lack of spending discipline has become a prominent bear thesis, and one of the most common reasons why some growth managers will not own BioMarin. Cowen assigns an 18% probability to this scenario. BioMarin closed Wednesday at $68.76.
Surprise #5
Amgen Inc. (NASDAQ: AMGN) is the top performing biotech stock in 2014. The venerable biotech giant has become the sellsides favorite whipping boy with only 50% of analysts assigning a Buy rating to the stock. The Cowen team feels that at a very low 14 times 2014 earnings, the stock has the lowest multiple of all the biotech large caps by a large margin. With solid earnings, a robust pipeline and a higher dividend, the stock may become very attractive to portfolio managers, especially if there is a significant correction in 2014. The Cowen analysts assign a 15% probability. Investors are paid a 1.6% dividend. Amgen closed Wednesday at $112.73.
Surprise #4
Biotech plunges into a bear market in 2014. The Nasdaq biotech index has soared the past three years, up 1,300 points and almost 140%. However, there are many worrisome signs that the biotech rally is closer to the top than the bottom. Most prominent, generalist interest in the sector is high. Historically generalist interest in the sector has waxed and waned, and peaks in interest have coincided with biotech market tops. That being said, Cowen only assigns a 10% probability to a biotech crash and ensuing bear market.
Surprise #3
Ariad Pharmaceuticals Inc. (NASDAQ: ARIA) was crushed back in October from over $20 to now under the $5 range, when sales of its drug Iclusig were suspended in the U.S. due to safety concerns. The Cowen team expects that Iclusig will eventually be reintroduced to the U.S. market with a narrowed label. Iclusig remains the only effective drug for T315I mutant patients, where the risk benefit seems positive. They assign a 5% probability. Ariad closed Wednesday at $4.98.
Surprise #2
Celgene Corp. (NASDAQ: CELG) fails to generate cash in 2014. Celgene’s non-GAAP financials have become increasingly disconnected from its cash flow generating capabilities. This has been driven by (1) an increase in upfront payments to corporate partners, which the company excludes from non-GAAP EPS and (2) and increase in stock compensation expense, which requires subsequent share repurchases for share stabilization. The probability assigned to this scenario is 3%. Celgene closed Wednesday at $162.48.
Surprise #1
Is very tongue-in-cheek and designed to give big institutional investors and portfolio managers a laugh. Michael Aberman, the Vice President of Strategy and Investors Relation at biotech giant Regeneron Pharmaceuticals Inc. (NASDAQ: REGN) wins the Mr. Universe bodybuilding competition on October 25, 2014. The analysts assign a very low .005% probability to this.
At 24/7 Wall Street we applaud when the firms we cover make an effort to show investors high-gain possibilities and trades for the coming year. It is easy just to lay out a conservative scenario that in most cases will play out. It is far more difficult to take some real longshots like the Cowen analysts have done.
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