Barrons - Biotech headed for revival - Biotech Ready to Bust Out
January 27,Biotech could be headed for a revival, Barron's says
Big biotechnology stocks could be headed for a revival, Ben Levisohn writes in this week's edition of Barron's. Biogen (BIIB) and Celgene (CELG) finished the week higher, AbbVie (ABBV) gained 14% after releasing earnings, and Gilead (GILD) rose 5% after a rating upgraded, he notes. Overall, the sector should also benefit from increased merger activity, lower taxes, and a less-onerous regulatory regime, the report adds. Reference Link :theflyonthewall.com
Barron's: Biotech Ready to Bust Out
ByBen LevisohnJanuary 27, 2018
Biotech Ready to Bust Out
Just as Elvis Presley slipped out of view before staging a televised comeback that carried him to even greater heights, big biotechnology stocks could be headed for a revival of their own.
Remember when biotech was once about as popular as you could get? Then the stocks peaked in 2015, as growing competition, expiring patents, and potential government efforts to rein in runaway drug prices took their toll. From July 20, 2015, through June 27, 2016, the iShares Nasdaq Biotechnology exchange-traded fund (IBB) dropped nearly 40%. Even after rallying in fits and starts, the group still remains more than 10% below its all-time high.
Small biotech companies have already been surging. For evidence, look no further than the performance of the market-cap-weighted iShares Nasdaq Biotechnology ETF, which gained 30% over the past 12 months, and the equal-weighted SPDR S&P Biotech ETF (XBI), which climbed 54% during the same period. The former has more than half its portfolio in large- and mega-cap stocks, while the latter has just 12% of its portfolio in those stocks.
Investors appear to favor smaller biotechs. Credit Suisse analyst Alethia Young says that just 47% of investors surveyed thought that big biotech would outperform during the first quarter of 2018, down from 67% at the beginning of 2017’s fourth quarter. More than 70% expected small- and mid-cap stocks to set the pace in 2018.
Biotech Ready to Bust Out
Now, however, big biotech appears to be joining the party. Biogen (BIIB) and Celgene (CELG) both finished the week higher, despite initially mixed reactions to earnings this past week. And on Friday, AbbVie (ABBV) gained 14%, after releasing earnings, while Gilead Sciences (GILD) rose 5%, after an upgrade. It’s hard to imagine that happening a year ago, when both stocks were seen as competitors in the zero-sum game that is hepatitis C.
On Monday, the Nasdaq Biotech Index jumped 3.1%, its biggest gain in six months, taking it to a new 52-week high. That on its own doesn’t mean much, observes Jason Goepfert, founder of Sundial Capital Research, but the market’s reaction to such a move might.
Whenever the index has climbed in the five days following such an occurrence, it’s gone on to rally over the following year 85% of the time, with an average gain of 30%. The iShares Nasdaq Biotech ETF rose 1% from Tuesday through Thursday, and it would take a very bad day to put the five-day results in negative territory.
Biotech has more going for it than just the technical setup. The S&P 500 Biotech index should provide consistent double-digit annual growth, but it trades at 18.5 times trailing 12-month earnings, a lower multiple than the broad-market S&P 500’s 23.7. The sector should also benefit from increased merger activity, lower taxes, and a less-onerous regulatory regime, says Daniel Chung, CEO at asset manager Alger. “Now the industry has clarity,” he says. “Overall, we’re bullish.
The iShares Nasdaq Biotechnology fund is still well off its high, but not all biotech stocks are.
Take Vertex Pharmaceuticals (VRTX). It’s nearly doubled during the past 12 months, thanks to merger speculation and the success of its cystic-fibrosis treatments.
Vertex could trigger disappointment when it releases earnings this coming Wednesday. However, the company is set up well for the months ahead, says Guggenheim analyst Tony Butler, who notes that the cystic-fibrosis treatment could be approved this year. Then there’s the potential sales boost that could come from Vertex’s collaboration with Crispr Therapeutics (CRSP). “We expect Vertex to continue generating revenue and profit growth in 2018 and beyond,” explains Butler, who thinks the stock could hit $180. It gained 7%, to $169.21, this past week.