Biotech Investors Still Have Opportunity

Jefferies recently initiated coverage on the biotech sector, and analyst Brian Abrahams discusses the firm’s bullish take on the sector in a new report. Biotech has had a solid 2015 so far, but Jefferies sees further upside for a number of biotech names.

Large-Cap Fundamentals

According to Abrahams, the fundamentals of large-cap biotech stocks are “as strong as they’ve ever been.” However, Jefferies believes that stock selection among large-caps is important these days, as many large-cap stocks are now fully valued. Abrahams adds that large-cap biotechs provide a bit of diversification and defensiveness that the smaller names lack.

Smid-Caps Volatility

When it comes to small- and mid-caps, volatility remains front and center. Abrahams points out that the valuations of many smaller names reflect “very optimistic expectations.” However, given that the number of smaller biotech companies is currently at an all-time high, there are plenty of names with strong fundamentals and pipelines and reasonable valuations that remain mostly under the radar.

Related Link: Why Biotech & Healthcare Are The Biggest Risks To The Market

Multiple Tailwinds

Abrahams sees the large cash flows of many pharma and large-cap biotech companies as the driver for aggressive M&A activity in coming months. In addition, the current regulatory environment appears to be very favorable for new drugs.

“Biotechs have limited exposure to China and emerging markets where there has been concern about macro-instability,” he adds.

Stock Picks

Jefferies names Celgene Corporation (NASDAQ: CELG) as its top large-cap stock, Alder Biopharmaceuticals Inc (NASDAQ: ALDR) as its top mid-cap stock and Immune Design Corp (NASDAQ: IMDZ) as its top small-cap stock. The firm also has Buy ratings on Biogen Inc (NASDAQ: BIIB), Incyte Corp (NASDAQ: INCY), Karyopharm Therapeutics Inc (NASDAQ: KPTI), OncoMed Pharmaceuticals Inc (NASDAQ: OMED) and ProNAi Therapeutics Inc (NASDAQ: DNAI).