Cowen and Company: Best Buys, Favorable Biotech Outlook Remain

Published: Oct 17, 2014

Cowen: Best Buys, Favorable Biotech Outlook Remain

October 17, 2014

By Riley McDermid, Breaking News Sr. Editor

Solid demand trends and another wave of U.S. price increases create a favorable outlook for most of biotech for at least the next two quarters despite the choppy market, a new report from biotech analysts at Cowen and Co. said Friday.

“Although currency headwinds and summer seasonality bear watching for companies with substantial ex-U.S. operations, we expect the third quarter to showcase biotech's superior earnings growth/visibility, and bolster investor confidence in larger-cap, financially-driven stocks,” wrote analysts on the group’s biotechnology team.

They found that the industry's major franchises continue to witness steady to growing demand trends while several new products are off to a strong launch. “We see few signs that biotech is losing its U.S. pricing power as the third quarter featured a number of price increases on key brands including Adcirca, Avonex, Iclusig, Jakafi, Neulasta, Prolia/Xgeva, Revlimid, Rituxan, Soliris, and Xtandi,” they wrote.

Companies picked by Cowen to report excess earnings above consensus include Alexion Pharmaceuticals Inc. , Amgen , Ariad Pharmaceuticals, Inc. , Biogen Idec, Inc. , Hyperion Therapeutics , Incyte Corporation , Medivation, Inc. , Regeneron Pharmaceuticals, Inc. and United Therapeutics Corporation .

Companies with significant foreign operations may experience “some adverse seasonality in the third quarter, and will start to experience foreign exchange headwinds, though hedging strategies appear to be successful at mitigating this impact.”

But because the third quarter always has more calendar selling days and fewer holidays relative, results reported during that time tend to “more than offset” the effects of European Union summer vacations.

As for the party being over in biotech because of the market’s recent volatility, Cowen analysts remained upbeat that a variety of concerns, both macro, like Ebola fears, global economic issues and a strengthening dollar, and micro, such as changes to tax law, pricing headlines, a weaker reception for biotech IPOs, have taken a toll on biotech stock performance.

“Yet in our view, none of these issues will have meaningful impact the business of biotech in which innovative therapeutics continue to benefit from an aging population, expanded insurance coverage, and an open U.S. pricing environment,” they wrote. Cowen said it expects the third quarter to “once again showcase biotech's unparalleled earnings growth and visibility.”

“In the past we have argued that a 20 percent annualized return might be expected from a biotech company growing earnings at 20 percent and maintaining a stable P/E multiple,” they concluded. “We take comfort in the fact that as of October the NASDAQ Biotech Index is up 16 percent year to date, and on pace to deliver just such a return. As we'd expect a similar return in 2015 (excluding any upward revisions to earnings) we see no reason why investors shouldn't be fully invested in biotech.”

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