Biotechnology was an incredible performer in 2013, outperforming the S&P 500 by a stunning 36%. The analysts at J.P. Morgan think that the huge outperformance may lessen but can stay intact. Driven by strong demand for the sector's key products, many positive phase III studies and a wave of successful initial public offerings, 2013 had all the tailwinds possible.
Looking to 2014, they think the fundamental backdrop is very similar to 2013 with:
- Beatable revenue growth expectations (they estimate 2014 growth will be +16% over 2013, which was up +12%), including several high-profile drug launches
- Many pivotal studies set to read out
- A stable/favorable regulatory and reimbursement environment
The J.P. Morgan team highlights in their report that on an earnings multiple basis, large-cap biotech stocks are trading much higher than the S&P 500. Despite the disparity, they think that large caps are poised for an inflection point in revenue growth over the next two years, driven by significant drug launches in major therapeutic categories. So while large-caps lead the pack in their top stocks to buy, they are bullish across the biotech market cap spectrum.
Here are the top biotechnology stocks to buy listed by market cap.
Gilead Sciences Inc. (GILD) leads off the list of top names to buy for 2014. With a successful hepatitis C drug Sovaldi launching and a very strong and impressive oncology pipeline, the company is poised for another outstanding year. The company also continues to innovate in the HIV arena, which grew 11% in 2013. The J.P. Morgan price target for the stock is $100. The Thomson/First Call estimate is $88. Gilead closed Tuesday at $72.78.
Vertex Pharmaceuticals Inc. (VRTX) is another big cap biotech leader to buy. The company also got on the biotechnology map with a blockbuster hepatitis C drug. The company looks poised to get revenue growing again with its cystic fibrosis franchise. It already has one drug approved, but Kalydeco by itself is only appropriate for about 4% of cystic fibrosis patients. To have Celgene-type success, Vertex needs drugs in its pipeline that are being tested with Kalydeco to be a success. J.P. Morgan has a $100 target, and consensus target is lower at $94. Vertex closed Tuesday at $74.49.
Incyte Corp. (INCY) is well positioned with a growing commercial franchise and significant near- and long-term pipeline optionality. It is making progress with its pipeline and is poised to expand its oncology drug Jakafi's development into more solid tumors. In 2014, the J.P. Morgan team believes news flow from a series of mid/late-stage programs could add significant value to the stock. The J.P. Morgan price target for the stock is posted at $60, and the consensus is at $48. Incyte closed Tuesday at $51.96.
BioMarin Pharmaceutical Inc. (BMRN) has finally begun to control its spiraling costs. The J.P. Morgan analysts feel that while BioMarin has an attractive pipeline, concern about management's ability to control costs and allow the company to become sustainably profitable. Over the past decade, BioMarin has become one of the top orphan drug companies, and it looks poised to stay there. The company is expected to post around $545 million in revenue this year and possibly around $700 million next year, following the approval of Vimizim, an enzyme replacement therapy for Morquio syndrome. The J.P. Morgan price target is $83, and the consensus target is $82. BioMarin closed Tuesday at $68.54.
Alkermes PLC (ALKS) hopes its ALKS-5461 can win approval from the Food and Drug Administration (FDA) and capture a significant share of the antidepressant drug market. With Eli Lilly's Cymbalta losing patent protection, the company has a huge opportunity to step into the market, which continues to grow each year as 7% of all U.S. adults experience clinical depression. The J.P. Morgan price target for the stock is $47, and the consensus figure is lower at $37. Alkermes closed Tuesday at $40.46.
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Aegerion Pharmaceuticals Inc. (AEGR) engages in the development and commercialization of novel therapeutics to treat debilitating and fatal rare diseases in the United States. They specialize in orphan drugs that in some cases often require less strenuous testing by the FDA. They anticipate that the company's Juxtapid drug will generate more than $1 billion in peak sales. The J.P. Morgan team sees $600 million in sales by 2017. The J.P. Morgan price target is posted at $105, while the consensus stands at $105.50. Aegerion closed Tuesday at $68.89.
Clovis Oncology Inc. (CLVS) will be presenting at the huge J.P. Morgan Healthcare conference, which begins next week in San Francisco. The stock has seen a steady increase since November 20, due to the acquisition of Ethical Oncology Science. Clovis acquired the company for its experimental mid-stage breast cancer candidate Lucitanib. This boosts the company pipeline to three strong candidates. J.P. Morgan has a $94 price objective for the stock, and the consensus number is at $92. Clovis closed Tuesday at $61.42.
While it is unlikely that the biotech sector sees the kind of outperformance posted in 2013, it is a likely bet that numbers will continue to be strong. In addition, many large pharmaceutical companies are seeing patent expirations on their top selling names. If they do not have strong pipelines, they may look to acquisitions to expand their potential product offerings.