Oppenheimer Incrementally More Bullish on Gilead, Remains Cautious On Vertex

• Wendy Lam of Oppenheimer maintained an Outperform rating on shares of Gilead Sciences, Inc. GILD and Perform rating on shares of Vertex Pharmaceuticals Incorporated VRTX.
• Lam noted that Gilead's two core franchises offer a "durable foundation" of substantial long-term revenue growth.
• Lam also suggested Vertex investors "stay on the sidelines."

Biotechnology and healthcare stocks have come under pressure as of late with the iShares NASDAQ Biotechnology Index (ETF) IBB having lost more than 20 percent over the past three months.

According to Wendy Lam of Oppenheimer, Gilead Sciences was once the "large-cap darling" of the Biotechnology index but have been under pressure as of late due to concerns over competition, drug pricing, and the sustainability profile of its HCV/HIV revenues.

However, an "objective" look at that company's two core franchises reveals a "durable foundation" of "substantial" long-term revenues from both segments.

Lam said there is "plenty of steam" left in HCV and a "sharp" drop-off in patient volumes is "unlikely" given improved drug access and increasing diagnoses/treatment. The analyst added that the HIV franchise remains "durable" as TAF, a safer and more potent version of Viread, will drive further growth even as the franchise matures.

Meanwhile, Gilead's "strong" cash position, coupled with expectations for "tempered" growth and a "weak pipeline" will motivate the company to seek out a "major" acquisition in the next 12 to 18 months in order to "lock in" long-term growth opportunities. The analyst suggested the company should focus on oncology (specifically immune-oncology) which can result in "strong synergies" with its already existing franchise.

Shares remain Outperform rated with a price target raised to $124 from a previous $120.

Vertex Stock To Trade 'In Line'

In a separate report, Lam maintained a Perform rating on shares of Vertex with no assigned price target.

Lam is "bullish" on Vertex's Orkambi as it will see peak sales of $4.6 billion. However, the "sky-high" and "lofty" Orkambi expectations are already priced into the stock. At the same time, the analyst has "low expectations" for the F508del/minimal function study while the company's other three Phase 3 studies offer "limited potential" for expansion of the addressable patient population.

On the other hand, Lam did state that Vertex's investigational corrector VX-661's "real value-add" is a part of the triple combo with Kalydeco plus next-generation corrector VX-152 or VX-440. However, the analyst views the opportunity as "high-risk" given the regimen's early stage in development and potential for varied responses.

Finally, Lam pointed out that Galapagos, Novartis, and other firms are actively developing drug candidates that will directly compete with Vertex's Orkambi and Kalydeco. Although all the drug candidates are still in early stages, Vertex won't see any commercial threat for "several years."

Bottom line, Lam stated that absence of any major catalysts over the next 12 to 18 months (the next meaningful update from VX-661/Kalydeco and next-gen triple combination programs isn't expected until 2017) implies the stock will trade "in line."