Morgan Stanley On Big Biotech: Upgrades, Pfizer, Vertex, Alexion, Cuts Gilead, Valeant

• Shares in healthcare broadly and biotech specifically have been under pressure over the past one month. Most big biotech stocks are down since September 2.
• Morgan Stanley analysts have commented on the cash position and pipelines of big biotech companies, against the backdrop of growing concerns around government’s actions on drug pricing.
• The analysts commented on whether the recent decline in shares offer attractive entry points and on the near-term catalysts in the current volatile market.

Cash Support

Analyst David Risinger upgraded the rating on Pfizer Inc. PFE from Equal-weight to Overweight, while raising the price target from $35 to $38.

Following years of declining revenues, including an estimated 4 percent decline in 2015, Pfizer is expected to begin generating revenue growth in 2016, backed by Ibrance sales. Risinger expects the company to record 9 percent revenue growth next year, including the acquisition of Hospira.

Management appears committed to increasing shareholder value, and Pfizer has a strong cash position. Risinger estimates that that company has $22B in cash, which would help it capitalize on opportunities.

Drug Launch To Boost Profitability

Analyst Matthew Harrison upgraded the rating on Vertex Pharmaceuticals Incorporated VRTX from Equal-weight to Overweight, while raising the price target from $118 to $148.

Vertex shares have been under significant pressure, and the stock has underperformed peers on concerns over competition and over-ownership. Harrison considers the recent decline as “an attractive entry point” and expects the stock to outperform in the near term.

“Based upon an analysis of biotech companies which transition to profitability, companies which become profitable typically outperform peers by 15x in the following 12 months,” Harrison noted. He further cited the possibility of the Orkambi launch beating consensus expectations. “Importantly, while Vertex sells high-priced drugs, we see orphan drugs as relatively insulted from pricing concerns.”

Harrison said that data from the ENaC inhibitor, the next-gen corrector entering the clinic and the '661 het-min study, would act as another near-term catalyst.

Upside From New Product Cycle And Pipeline

Analyst Matthew Harrison upgraded the rating on Alexion Pharmaceuticals, Inc. ALXN from Equal-weight to Overweight, while raising the price target from $186 to $211.

Harrison believes that the recent decline in shares presents “an attractive entry point for Alexion.” Although Alexion’s shares are down only about 7 percent, versus a decline of about 10 percent for its large-cap biotech peers, Alexion has underperformed year-to-date.

Alexion’s robust set of new product launches and potential pipeline could enable the company to outperform the weakness due to concerns around government pricing. “Further, we see orphan drugs as relatively insulated from any government action on pricing,” Harrison wrote.

The analyst estimates the peak Myasthenia Gravis and Neuromyelitis Optica sales at ~$1B. Apart from these, key upside drivers include the new product launches of Strensiq and Kanuma and the diversification of Soliris into next-gen products.

Relative Valuation In Question

Analyst Matthew Harrison downgraded the rating on Gilead Sciences, Inc. GILD from Overweight to Equal-weight, while maintaining a price target of $127.

In the report Morgan Stanley noted, “While we continue to see significant absolute upside in GILD, we see relatively greater near-term upside in ALXN and VRTX which we upgrade.” Although Gilead's shares enjoy downside protection from strong cash generation, which gives the company significant optionality based on capital deployment, the stock is unlikely to re-rate “on a single M&A event.”

While expressing optimism regarding the long-term strength of the US market, Harrison commented that “consensus may become concerned about the 4Q trajectory and management's ability to offer strong guidance for 2016.”

Dark Clouds Of Drug Pricing Concerns

Analyst David Risinger downgraded the rating on Valeant Pharmaceuticals Intl Inc VRX from Overweight to Equal-weight, while reducing the price target from $284 to $200.

Risinger said that although Valeant's underlying franchises are attractive, there is uncertainty surrounding any multiples expansion, against the backdrop of the ongoing scrutiny of the company’s US drug price inflation.

Risinger added that he was “less optimistic” about future M&A prospects given Valeant's “lower, re-set P/E and ability to potentially swap/issue equity.”