Is A Renaissance In Surging Biotechs Underway?

Print 02 March 2015
Gene Marcial / Forbce

Not too long ago, investing in biotechnology was perceived as plain gambling. The rewards could be high, to be sure, but so were the risks in playing the arcane biotech stocks.

That was because a biotech company’s success depended on the development of important drugs that could achieve government regulatory approval. Not only was it extremely difficult to develop effective treatments for serious ailments, but it was equally as difficult to persuade the Food And Drug Administration to approve their use.

But in recent years, the biotech industry has become an attractively rewarding sector for investors as the FDA bolstered its system to accelerate its approval process, particularly in the case of life-saving drugs. That was in large part due to the advance and fast progress by the biotrech companies in producing new and novel treatments for a variety of diseases.

“Breakthroughs in everything, from diagnostics to cancer immunotherapy” have resulted in a “renaissance” in biotechnology that’s now under way, says biotech analyst Jason Kolbert, senior managing director and head of Healthcare Research at Maxim Group. Today, “better clinical science is translating into earlier ‘proof of concept’ has made regulatory approvals more predictable,” he notes.

Kolbert expects this “paradigm shift” to translate into a higher valuation for the sector, “driven by better products with greater efficacy and fewer upside effects” which in turn has resulted in a higher rate of regulatory approvals.

“The fact that the number of FDA approvals has been trending positively each year is a great sign for the biotechnology space,” argues Kolbert. Not only does the industry help produce new wonder drugs but also aids in bringing down medical costs.

Kolbert points out that “the longer trends point to an upwards revaluation” of biotechs, spurred by “innovative new therapies that promise to actually lower the costs of treating diseases.”

Indeed, biotech stocks have been ramping up, surprising and exceeding most of Wall Street’s expectations. “There is no doubt that biotech investors are content, if not outright happy with the sector’s performance year-to-date,” up about 9%-40%, says John McCamant, editor of the Medical Technology Stock Letter. And the standout stocks in the sector continue to deliver outsized returns, he adds, such as Pharmacyclics (PCYC), which has advanced some 40%, he adds.

It’s possible, of course, that the sector could also pull back because of the group’s powerful advance, as most of the large institutional investors have become fully invested in the large-cap biotechs. However, this group of deep-pocket investors are prepared to add to their holdings whenever the group goes into a downswing. “The safe haven and above-average growth rates continue to keep this sector in good stead with global investors,” says McCamant.

For Maxim Group’s Jason Kolbert, three large-cap stocks he favors among his long list of biotech buys are Gilead (GILD), which focuses on developing anti-infective medicines, primarily treatments for HIV; Medivation (MDVN), which develops novel therapies, such as a treatment for post-chemotherapy metastatic prostate cancer; and Teva Pharmaceutical Industries (TEVA), which is not only the largest maker of generic pharmaceuticals but a maker of important branded drugs.

Gilead, currently trading at $104 a share, with a huge market capitalization of $153 billion, is seen by Kolbert jumping to $127 in 12 months. Medivation, now at $111 a share with a market value of $8.5 billion, is expected to rise to $118, and Teva, which closed at $56.78 a share on Feb. 24, 2015, is expected to leap to $66.

John McCamant of the Medical Technology Stock Letter has a long lineup of sinewy biotech stocks, categorized in accordance with their market caps and product designs. Among its first-tier buy recommendations are Pharmacyclics, Alkermes (ALKS), and Celgene (CELG).

Pharmacyclics, which develops small-molecule drugs for the treatment of cancer and immune mediated diseases, is trading close to its high of $195.79 a share, way up from its 52-week low of $82.51. It’s still expected to climb to new record highs. The stock, with a market value of $12.9 billion, has become a top biotech favorite among the large institutional investors.

Alkermes, which develops medicines targeting widespread diseases, including central nervous system disorders, addiction, and diabetes, currently trades at $70 a share. Up from a 52-week low of $38, the stock is now trading not far from its high of $74. It’s expected to boost revenues to $605 million in fiscal 2014 (ending Mar. 31), and to $670 million in fiscal 2015, up from fiscal 2013’s $575.6 million. Revenues are driven for the most part by the company’s sales of its Risperdal Consta and Invega Sustenna, which are treatments for schizophrenia.

Celgene, which develops drugs for the treatment of cancer and immune-inflammatory related diseases, is another fast rising biotech. Currently trading at $123 a share, the stock is expected to climb to $146 in 12 months. Celgene is way up from is 52-week low of $66.85. S&P Capital IQ analyst Jeffrey Loo, who rates Celgene as a “strong buy,” says the large-cap biotech continues to have “robust growth prospects.” He expects its 2015 revenues to jump 21.5%, to $9.3 billion, and projects earnings of $4.75 a share for the year, up from 2014’s $2.39.

McCamant points to one impressive development in biotechs: For a long time, almost no one believed in gene therapy, antisense, or antibody drug conjugates. Yet today, he says, “they are among the hottest segments in biotech.”

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