“Batten Down the Hatches” But Look For Opportunity in Rough First Quarter, Says Analyst

Published: Apr 08, 2015

“Batten Down the Hatches” But Look For Opportunity in Rough First Quarter, Says Analyst
April 8, 2015
By Riley McDermid, BioSpace.com Breaking News Sr. Editor

Biotech investors need to be ready for a rough ride in coming weeks, as market volatility and a plethora of outside factors have combined to make the first quarter of 2015 one of the toughest for biotech in recent memory, Geoffrey Porges, a biotech analyst with Sanford Bernstein, said Thursday.

His latest note, titled “Tough Quarter Looming So Batten Down the Hatches and Wait for Opportunities,” looked at several different scenarios for a biotech sector already experiencing a rollercoaster ride.

“Today we are publishing our first quarter 2015 earnings preview call and updating our revenue and earnings forecasts to reflect the most recent trends in IMS U.S. market demand data, pricing changes, inventory and currency fluctuations,” wrote Porges in a note to investors.

Porges said his team’s analysis of these trends and influences have “mostly negative” implications for the approaching earnings season and the outlook for this quarter for biotech operating results is “even more negative than usual” for this time of year.

Porges said the biggest effects to consider are currency (“widely appreciated but probably still under-modeled”), fewer domestic shipping days sequentially and year over year, channel inventory reductions after fourth quarter increases, increased treatment discontinuations due to first quarter co-pay renewals, increased discounting due to payer consolidation, and effects of adverse weather on drug distribution, prescribing and fulfillment.

It is many quarters since there has been such an alignment of negative factors for industry results in a single quarter and we expect investors will find opportunities to pick up high quality names in the group at temporarily discounted valuations during this reporting season,” wrote Porges.

“Choruses of ‘slowing growth,’ ‘no growth,’ ‘negative growth’ and ‘ex-growth’ are likely to greet the results of companies such as Celgene , Gilead Sciences, Inc. and Alexion Pharmaceuticals Inc. ; these reactions will be exaggerated but still concerning, particularly to the temporary owners who have occupied much of the increased cap of the biotech sector in recent quarters,” said Porges.

Sanford Bernstein estimated that the recently increased volatility for the sector will continue through this earnings season. But the upside to that could be some bargains, as fundamentals-based investors find “attractive entry-points” into what will remain “very reliable” long term growth businesses.

“Paradoxically our analysis of all these variables suggests that the stock most likely to beat expectations this quarter is Gilead, which is also the cheapest name in the group today,” said Porges. “Most other stocks seem likely to report results that are in-line or possibly even below consensus and our estimates.”

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