Health and Healthcare

RBC Says Buy Big Biotechs Now for Possible Big 2016 Gains

Lee Jackson

Published: August 1, 2016 9:25 am

Last Updated: January 13, 2020 5:04 am

We have talked about it for months here at 24/7 Wall St., and now many on Wall Street are talking about it as well. The selling in biotech, much of which was started by a tweet from Democratic presidential candidate Hillary Clinton last fall over drug pricing, absolutely destroyed the sector. Finally, that concern seems to be waning and investors are returning to the battered sector. Stocks got so cheap that they were trading as if there was no or little value in their product pipeline, an unheard of metric in biotech.

A new RBC research report notes that the XBI biotech index was up 13% over the past month, versus 5% for the S&P 500, and it contends that the political chatter and overhang worry is going away. The report also noted that at the recent conventions there was little to no mention of drug pricing.

What really look attractive now are the large cap leaders, and RBC has four rated Overweight.

Amgen

This company posted outstanding second-quarter earnings and the biotech giant remains a top stock for investors to buy. Amgen Inc. (NASDAQ: AMGN) focuses on areas of high unmet medical need and leverages its biologics manufacturing expertise to strive for solutions that improve health outcomes and dramatically improve people’s lives. A biotechnology pioneer since 1980, Amgen has grown to be one of the world’s leading independent biotechnology companies, reaching millions of patients around the world and developing a pipeline of medicines with breakaway potential.

The company posted revenues above expectations and showed strong expense management. It also raised guidance for revenues and earnings, and many on Wall Street think the numbers could be conservative. Amgen also reaffirmed interest in mergers and acquisitions activity as a way to sustain long-term growth.

Many on Wall Street point to the company’s tremendous pipeline and outstanding forward earnings and revenue capabilities. Amgen’s double-digit earnings and revenue growth rate is expected to continue for the foreseeable future because of the company’s very deep clinical pipeline, which includes potential blockbusters Repatha for high cholesterol and Kyprolis for relapsed multiple myeloma. Amgen also has one of the industry’s deepest biosimilar pipelines, which is expected to generate upward of $3 billion in annual sales in the years ahead.

Amgen shareholders receive a 2.33% dividend. The RBC price target for the stock is $190, and the Wall Street consensus target is right in line at $189.94. Shares closed Friday at $172.03.

Biogen

This stock is down a stunning 40% from highs that were printed in March of last year. Biogen Inc. (NASDAQ: BIIB) discovers, develops and delivers to patients worldwide innovative therapies for the treatment of neurodegenerative diseases, hematologic conditions and autoimmune disorders. Founded in 1978, Biogen is one of the world’s oldest independent biotech companies, and patients worldwide benefit from its leading multiple sclerosis (MS) and innovative hemophilia therapies.

While many on Wall Street acknowledged in the past that the company’s core MS drug market is facing challenges going forward, with most diagnosed patients now treated, payers limiting net benefits from price increases and competing entrants expected. With those issues in mind, the firm is still positive on Tysabri, especially for secondary-progressive multiple sclerosis, with upcoming clinical data a big factor.

The analysts also feel that a combination of cost reductions in tandem with the still strong MS franchise, which may not be as challenged by competitors as some on Wall Street think, can help the company beat earnings estimates this year. With a strong pipeline, the stock is a solid choice for aggressive growth investors. When Biogen posted outstanding earnings, the stock rallied sharply.

The RBC price target is $375, while consensus target is lower at $363.31. The stock closed Friday at $289.93.
Celgene

This company is also one of JPMorgan’s top biotech picks for 2016. Celgene Corp. (NASDAQ: CELG) has an outstanding partnered pipeline, which most think is low risk and has the potential to yield several blockbuster drugs. Certain Wall Street analysts also think the company can grow earnings 15% on a compounded annual growth rate basis going forward. Otezla, which treats psoriasis and psoriatic arthritis, had achieved considerable prescriptions among physicians, but the scripts have slowed after a solid launch, showing the importance for sales outside of the United States.

Celgene’s blockbuster blood cancer drug Revlimid continues to dominate. Pomalyst sales also continue to be solid. Cancer drug Abraxane is also growing at a respectable rate, so the company continues to have a strong lineup of top-selling drugs.

The company reported outstanding second-quarter results with revenues up 21% year over year. In addition, the company raised sales guidance to $11 billion on strong growth across most major products driven by 16% in demand and 6% in pricing. Upcoming catalysts include GED-0301 endoscopy study in Crohn’s disease with top-line results expected in August/September.

Wall Street analysts have noted that the company has discussed at their recent conference the benefits of longer duration Revlimid. Celgene has a very compelling pipeline, and with four existing Phase 3 trial assets, that may add strong new drugs and revenue prior to the end of the decade.

The RBC price objective is $135, and the consensus target is $136.45. The shares closed Friday at $112.19.

Gilead Sciences

This company is trading at an astounding multiple of less than seven times estimated 2016 estimated profits. Gilead Sciences Inc. (NASDAQ: GILD) discovers, develops and commercializes medicines in areas of unmet medical need in North America, South America, Europe and the Asia-Pacific. Its products include Stribild, Complera/Eviplera, Atripla, Truvada, Viread, Emtriva, Tybost and Vitekta for the treatment of human immunodeficiency virus (HIV) infection in adults; and Harvoni, Sovaldi, Viread and Hepsera products for the treatment of liver disease.

The company recently announced that the FDA has approved Letairis in combination with Eli Lilly’s Adcirca (tadalafil) for reducing the risk of disease progression and hospitalization and improving exercise ability in patients suffering from pulmonary arterial hypertension. Both Letairis and Adcirca are approved in the United States, European Union and elsewhere as once-daily treatments for patients with pulmonary arterial hypertension.

Second-quarter total revenues met consensus and earnings-per-share beat on strength in Sovaldi/HIV franchise. 2016 product sales guidance was lowered. HCV sales missed due to pricing, unfavorable payer mix, lower patient starts and shorter treatment duration. Share buybacks are expected to be lower for the rest of 2016, and many on Wall Street think that could suggest willingness for pipeline acquisitions.

Investors are paid a 2.37% dividend. The RBC price target is $105, while the consensus price objective is $106.35. Shares closed Friday at $79.47.

Just because these stocks are cheap relative to the S&P 500, history says they won’t stay that way. In fact, the current consensus four-year growth expectations for the large cap biotechs have dipped since 2012 and is currently at the lowest level since 2010. In other words, cheap and somewhat ignored.