While September and the third quarter were train wrecks for almost every asset class, it was especially hard on the biotech sector. In fact, the Nasdaq Biotech Index was down 12% in September, versus a 3% decline in the S&P 500. Things really got worse late in the month when politicians rolled out the populist crowd winner of demanding lower drug prices and wanting change in the industry. Then the selling really picked up in earnest.

A new report from Cowen, while acknowledging that valuations probably really will start to matter more again, says the end is hardly nigh. It also points out that many skittish portfolio managers are anxiously awaiting third-quarter numbers for the top companies to make sure that the biotech thesis is still in place.

The report points to three stocks that are the most loved by the buy side and portfolio managers. Two are rated Outperform at Cowen, and one has a Market Perform rating.

Celgene

This is one of the Outperform-rated picks and Cowen feels this large cap stock has solid upside potential for the rest of 2015 and next year, especially after the beating the biotechs have taken recently. Celgene Corp. (NASDAQ: CELG) has an outstanding partnered pipeline, which the firm thinks is low risk and has the potential to yield several blockbuster drugs. Some Wall Street analysts think Celgene can grow earnings 15% on a compounded annual growth rate basis going forward.

The company provided strong guidance earlier this year surrounding its Otezla launch and encouraging feedback from doctors on the potential of new triplet regimens in myeloma. Analysts across Wall Street are raising their estimates for the drug as, after a little more than a year on the market, Otezla, which treats psoriasis and psoriatic arthritis, has achieved considerable prescriptions among physicians.

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Celgene’s blockbuster blood cancer drug Revlimid continues to dominate. Pomalyst sales grew nearly 46% year over year last quarter. Cancer drug Abraxane is also growing at a respectable rate, so the company continues to have a strong lineup of top-selling drugs. While second-quarter numbers were solid, the third quarter and the rest of the year could prove to be better.

The Cowen price target for the stock is $150. The Thomson/First Call consensus target is $149.59. Shares closed on Friday at $116.44.
Cempra

Cowen has one rated Outperform as well. Cempra Inc. (NASDAQ: CEMP) is a clinical-stage pharmaceutical company focused on developing antibiotics to meet critical medical needs in the treatment of bacterial infectious diseases. Many analysts feel that Cempra is a very positive story, as many of the other players have left the antibiotic market.

Solithromycin is the company’s potent fourth-generation macrolide antibiotic. The oral data in Phase 3 that was out last January was very positive. It’s polymorph patent extends to 2032, which is significant. With other drugs also well along in clinicals, the company may be a target for a bigger biotech.

The Solithromycin Phase 3 SOLITAIRE-IV data is due out by December. Not only could that be huge, but positive data could get a quick FDA approval as there is such a desperate need. It also could get big pharmaceutical companies thinking about a bid for the company.

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Cowen has a price target of $53, but the consensus target is lower at $49.30. The shares closed on Friday at $31.78.

Seattle Genetics

The stock is rated Market Perform at Cowen, but buy-side managers love it. Seattle Genetics Inc. (NASDAQ: SGEN) develops and commercializes antibody-based therapies for the treatment of cancer. The company is developing antibody-drug conjugates, a technology designed to harness the targeting ability of antibodies to deliver cell-killing agents directly to cancer cells.

Julian and Felix Baker’s hedge fund, Baker Brothers Holdings, continues to relentlessly buy stock in the company. Recently they bought an additional 1.8 million shares at prices that ranged from $41.43 to $48.28. This brings the fund’s holdings to a massive 36 million shares, or 26% of the outstanding shares of the issuer. Baker Brothers has been adding to its stake continuously over the past seven quarters, with the holding nearly doubling in size during that time.

The $40.50 Cowen price target is lower than the consensus target of $47.35. The stock closed on Friday at $40.32.

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Just because the portfolio managers like these stocks doesn’t mean investors have to. One thing that is important to remember is that the top hedge funds and others that run capital have superb research capability, and they do their homework. So at the end of the day, they are loved for a reason — or lots of them.

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