Today is the first Monday of the new year, which means sell-side analysts are posting their outlooks for the biotech sector in 2014 and talking up their favorite stocks.
J.P. Morgan's biotech analysts are bullish on the sector heading into next week's big investment conference in San Francisco:
The biotech sector had a stellar 2013 (NBI: +65%; S&P: +29%) driven by strong demand for the sector's key products, many positive phase 3 studies and a wave of successful IPOs. Looking to 2014, we think the fundamental backdrop is very similar with 1) beatable revenue growth expectations (2014e: +16% vs. 2012/2013: +12%) including several high-profile drug launches, 2) many pivotal studies set to read out and 3) a stable/favorable regulatory and reimbursement environment. Notably, these factors should continue to make biotech attractive to generalist investors, who played a major role in the 2013 outperformance. Our bias is to stick with large caps as well as mid-caps with approved products; revenue/EPS/cash flow forecasts for 2015 and beyond look broadly beatable, in our view. In contrast, we suspect that "pure pipeline" or tech platform small caps could be more volatile in 2014. We continue to believe that the biotech industry is in the early innings of an innovation cycle with many label expansion opportunities and novel agents in phase 2 or 3 trials that are largely unaccounted for in Street models. Hence, we are bullish on the group for 2014.
UBS offers four reasons biotech should stay strong in 2014:
(1) Fundamentals are still very strong for many individual companies, in terms of visibility into new product cycles and 3+ year growth;
(2) We're bullish on bellwether product launches for Gilead's Sovaldi and Biogen's Tecfidera, which will keep confidence high in the commercial relevance of biotech innovation;
(3) Several key pipeline events are expected, particularly among mid-caps where we are most bullish;
(4) Macro conditions appear to favor risk-taking and growth, considering our Equity Strategy and Economics teams' positive views on investment in 2014 and GDP growth.
Goldman Sachs is taking a more negative view on biotech for 2014, downgrading the sector to Neutral from Attractive:
In 2013 the biotech sector outperformed (+66% vs. S&P +30%), and since the start of the recent rally (which we peg to the readout of the first Tecfidera Phase 3 data on April 21, 2011) the sector is up +116% vs. S&P +37%. We see current valuations on the majority of the stocks as fair and expect earnings rather than multiple expansion to dictate future stock performance. While we continue to believe biotech deserves to trade at a premium multiple to the S&P (given its superior growth profile), we find it difficult to make a case for continued multiple expansion (or a higher premium relative to S&P) or lower discount rates based on the following: (1) our estimates for key product cycles are now in line to slightly below consensus, (2) we have a more measured view of upcoming 2014 pipeline readouts, (3) revenues from the sector are continuing to shift towards small molecules and away from biologics (BIIB, CELG and GILD) whereas pharma's revenue mix has been moving in the opposite direction (ABBV and BMY), and (4) GS economists are projecting the 10-year Treasury rate to rise to 3.25% in 2014. In conjunction we downgrade ALXN to Neutral and CELG to Sell. We are also changing our estimates and price targets for ARIA, CBST, UTHR, VRTX, ALKS and INFI to reflect recent pipeline updates.
-- Reported by Adam Feuerstein in Boston.
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