Goldman Sees 2016 'Flight To Quality' In These Biotech Stocks

• Smid-cap biotech shares have pulled back significantly since July 2015.
• Goldman Sachs’ Salveen Richter initiated coverage of the Smid-cap biotech segment with a Neutral view.
• Richter believes that valuations are stretched and investors could gravitate towards quality stocks.

The Smid-cap biotech shares have enjoyed a 3.5-year rally, and the NBI index has pulled back 19 percent since the record highs of July 2015. The company fundamentals are intact.

“Key forward drivers are innovation (enabling a renaissance in R&D productivity) and M&A (major pharma/large-cap biotech companies need to bolster their pipelines/ technologies). Yet the recent IPO influx and broad-based buying led to some “stretched valuations”, which we believe will result in a “flight to quality”,” analyst Salveen Richter wrote.

BioMarin: Kyndrisa As Key Upside Driver

BioMarin Pharmaceutical Inc. BMRN has been initiated with a Buy rating and a price target of $158. Richter believes BioMarin is a “name to own” in 2016.

He elaborated that the company is a key diversified, rare disease player and has:

1. Significant upside with a number of catalysts into yearend 2015 and through 2016, with Kyndrisa/drisapersen being the key driver
2. Ability to achieve non-GAAP profitability in 2017 on Kyndrisa approval
3. An attractive M&A profile in view of its robust pipeline.

“Its five approved products address areas of high unmet need, on track to generate $850mn-$880mn in worldwide sales in 2015 (est. $2bn in peak base business worldwide sales in 2026),” Richter said, while adding that the FDA Advisory Committee event for Kyndrisa for the orphan disease Duchenne muscular dystrophy is likely to be positive.

Bluebird Bio: LentiGlobin As Key Value Driver

bluebird bio Inc. BMRN has been initiated with a Buy rating and a price target of $165. Richter believes the company is a leading gene therapy play, and has:

1. An attractive entry point, following the 62 percent decline in shares since July 2015, despite fundamentals being intact
2. Major upcoming catalysts into yearend 2015 and through 2016.

“BLUE’s key value driver is LentiGlobin, a lentivirus-based gene therapy for rare blood disorders, betathalassemia major and sickle cell disease (SCD). BLUE is also developing Lenti-D, a gene therapy for the rare fatal neurological disease childhood cerebral adrenoleukodystrophy (CCALD), with interim pivotal data expected in 2016,” the Goldman Sachs report noted.

Incyte: Jakafi And Baricitinib To Drive Profitability

Incyte Corporation INCY has been initiated with a Buy rating and a price target of $135. Richter considers the company as being best positioned in the biotech immuno-oncology segment for 2016.

He added that the company is on track to achieving profitability in 2017, with Jakafi sales in 2 rare blood cancers and revenue diversification from royalties on baricitinib for rheumatoid arthritis.

“INCY is an attractive M&A target, in our view, given its robust drug discovery capabilities,” the analyst said, while adding that Jakafi is on track to generate US sales of $2bn.

Kite: Regulatory Filing Of KTE-C19 Expected in 2016

Kite Pharma Inc KITE has been initiated with a Buy rating and a price target of $111. The company is developing “cell-based cancer therapies through its engineered T-cell, type of immune cell that fights infections, platform which consists of two key technologies: 1) chimeric antigen receptors (CAR Ts) and 2) T-cell receptors (TCRs),” Richter noted.

Kite’s lead pipeline drug, KTE-C19, was on track for regulatory submission for diffuse large B cell lymphoma in yearend 2016. Solid tumor data could be a major upside driver in 1H16.

Kite is also developing a TCR for cervical and head and neck cancer and a CAR T for glioblastoma, both of which could report data by mid-2016.

Seattle Genetics: Catalysts Far On The Horizon

Seattle Genetics Inc. SGEN has been initiated with a Sell rating and a price target of $33. Although the company is a leader in the antibody drug conjugate segment, the Sell rating is based on:

1. The shares already reflecting the upside from commercial drug Adcetris through label expansion
2. Unclear outlook for the pipeline

Although the company has a broad platform of antibody drug conjugates, major catalysts are too far into the future, Richter pointed out.

The Goldman Sachs report added, “We also see lack of clarity on the early stage pipeline, with two lead blood cancer drugs in competitive diseases (SGN-CD19 in B cell malignancies) or historically difficult to address indications (SGN-CD33 in acute myeloid leukemia).”