Trading well below their one-year highs, big biotech stocks look set for a rebound as their fundamentals are showing signs of improvement. More stable product pricing environments, earnings improvement and successful new drug trials, are just a few of the factors that could lead to a biotech rally in the second half of the year, with firms like Gilead Sciences Inc. (GILD), Alexion Pharmaceuticals Inc. (ALXN) and Vertex Pharmaceuticals Inc. (VRTX) leading the charge.
But investor sentiment has also noticeably picked up with a net flow of $76 million into the biotechnology sector last week following two straight weeks of $500 million inflows, “a trend we haven’t seen since September,” writes Raymond James’ Laura Chico, according to Barron’s. (See also: Why Biotech Stocks May Reach New Highs.)
|Stock Performance - 1 Year|
|Biotech Index (IBB)||12.6%|
Oppenheimer analyst Hartaj Singh sees a much more stable pricing environment for the company’s hepatitis C treatments, as well as increasing investor interest in Gilead’s nascent immunology and non-alcoholic steatohepatitis (a type of fatty liver disease) franchises.
Despite falling short of analyst earnings estimates in the last quarter, Jefferies analyst Michael Yee, after talking with the company’s management, believes that this will be Gilead’s turnaround year, according to a separate article by Barron’s.
Yee sees both revenue and earnings picking up again in 2019 and growing over the next couple of years. He notes that the if the company’s M&A-positive orientation provides an opportunity to purchase “fairly de-risked assets,” such news should be enthusiastically welcomed.
Alexion, one of the biotech industry’s premiere rare-disease drug franchises, is riding on a string of positive earnings surprises over the past year, including the latest 12% surprise inciting Singh to wonder “when the Street will start giving management credit for relentless execution.”
Along with the strong earnings performance, development of the company’s new drug ALXN1201 appears to be moving along well. A trial back in mid-March demonstrated that the drug was capable of acting as an effective treatment for Paroxysmal nocturnal hemoglobinuria (PNH), a rare blood disorder.
There’s also a lot of potential for M&A activity in the biotech sector right now, and with Alexion being viewed as a strong takeout target, shareholders could pocket a nice acquisition premium. (See also: Biotech M&A Spree Could Push Sector to New Record Highs).
One of the industry’s other top rare-disease drug franchises, Vertex has also had a string of positive earnings surprises in the past year, and trials for its regimen for cystic fibrosis patients have been going well. Prices for its shares now have some catching up to do.
Back in April, Singh was arguing that investors should expect to see Vertex do what Alexion did after breaking even—that is, have its earnings per share (EPS) rise 325% and its share prices rise 159% in the subsequent three years. Vertex’s EPS has grown a whopping 433% since breaking even in 2015, while its shares have risen just 28%, according to a separate article by Barron’s.