J.P. Morgan: Biotech Stocks Heading Higher in 2013

NEW YORK ( TheStreet) -- The healthcare analyst team at J.P. Morgan released its 2013 Global Biotech Outlook Wednesday, ahead of the investment bank's closely followed healthcare conference that begins on Monday.

The J.P. Morgan biotech analysts are bullish on 2013:

Biotech had a strong 2012 (NBI index: +33%; S&P 500: +14%) driven by steady M&A activity, upside drug launches, and positive pipeline developments. Althoughmultiples have expanded to 16X today from 13X in early 2012, we believe strongfundamentals should continue to drive biotech outperformance in 2013. Indeed, theFDA environment should remain favorable as it was in 2012, and we don't see ahigher level of reimbursement risk looking to 2013. In our view, revenue growthexpectations look beatable (2013e: +8%; 2011/2012e: +13-14%), especially withseveral high-profile drug launches. In addition, we see a lot of meaningful phase 3results on the near-term horizon. While there is risk to the macro picture in 2013 in theUS and Europe, the biotech sector has its defensive attributes, particularly for thelarger caps or SMids with approved products. So overall, we think that biotech is wellpositioned for 2013 from a fundamental / sentiment / catalyst perspective.

The firm's favorite U.S. biotech stocks for 2013 are Gilead Sciences ( GILD) , Vertex Pharmaceuticals ( VRTX), Medivation ( MDVN), Onyx Pharmaceuticals ( ONXX), BioMarin ( BMRN) and Orexigen Therapeutics ( OREX).

Our favorite names for 2013 are GILD and VRTX in large capand MDVN in mid-cap biotech. All three companies have a significantnumber of value-creating events in 2013 including: 1) data from multiple phase3 trials of Gilead's GS-7977 in hep C, which we expect to support a robustregulatory filing in the US and Europe and a launch in early 2014, 2) data fromseveral phase 3 trials of Vertex's Kalydeco in cystic fibrosis (CF), which shouldexpand its current label, as well as additional phase 2 data in the larger F508delCF population, which should increase confidence in the probability of phase 3success in this population, and 3) a very robust launch of Xtandi in castrationresistantprostate cancer, as well as label-expanding phase 3 data in pre-chemoPC (PREVAIL study) and other phase 2 data in early-stage PC.

Heading into 2013, our preferred mid-cap names remainONXX and BMRN (both were top 2012 picks as well). On the small-cap side (less than $1B cap), we'd highlight OREX. In our opinion, ONXX is uniquelypositioned with 3 approved oncology products, and we believe Kyprolis andStivarga both offer upside to current 2013 expectations. We believe BMRN hasone of the more compelling combinations of tangible commercial value andpipeline optionality, and we anticipate the substantial de-risking that took placein 2012 (GALNS) will drive increased generalist interest in 2013. On the morecontrarian side, we'd look to have some obesity exposure. We also like VVUSon the mid-cap side, and OREX offers some shielded leverage to the Qsymialaunch as well as its own high-probability clinical event (interim LIGHT CVdata).

In Europe, J.P. Morgan likes Shire, UCB and Algeta for 2013:

Our top picks for 2013 are SHP and UCB in the mid-caps, with ALGETA our top pick within the small caps. We like Shire for the attractive risk/reward ahead of the Vyvanse PIII Depression study, and the PIII Vyvanse H2H vs. Concerta, both expected in H2'13. For UCB we see the start of the growth phase in 2013, boosted by briveracetam PIII data in H1 '13 offering further upside. On Algeta, FDA approval of Alpharadin in Q3 '13, assuming priority review, should go some way to close the significant valuation gap.

Biotech sector headwinds that could cause investors problems in 2013, according to J.P. Morgan:

Economic uncertainty in the US and EU was a major concern in2012 that didn't result in many negative surprises within biotech. Nevertheless, thisuncertainty is likely to continue in 2013. In addition, we expect an increased focuson drug pricing, especially in the EU and typically among the orphan drugs. Weremain comfortable with this risk for biotech, especially with the increasing numberof first-in-class drugs coming out of pipelines. Finally, disappointing launches canturn sentiment negative very quickly, such as with Dendreon's Provenge, but weview expectations for launch stories as generally beatable looking to 2013.

The 31st Annual J.P. Morgan Healthcare Conference runs Jan. 7-10.

-- Reported by Adam Feuerstein in Boston.

Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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