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The biotech sector has seen some year-to-date strength, as reflected by the nearly 11-percent advance in the iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB). The upward momentum became more pronounced in late June.
Against this backdrop, a Goldman Sachs analyst is recommending a pair trade in the specialty pharma subsector.
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The Analyst
Analyst Dana Flanders upgraded Endo International PLC (NASDAQ:ENDP) from Sell to Neutral and increased the price target from $14 to $15.
The analyst downgraded Mallinckrodt PLC (NYSE:MNK) from Neutral to Sell and upped the price target from $27 to $28.
The Thesis
The specialty pharma subsector has outperformed the S&P 500 Index since May 1 in the wake of the first-quarter reporting season and improving fundamentals, Flanders said in a Tuesday note. (See his track record here.)
The group is generally poised to continue to meet or beat 2018 guidance despite mixed pipeline progress and low innovation relative to other therapeutic subsectors, the analyst said.
Endo's Progress Encouraging, But Valuation Stretched
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The progress Endo has made in its base business against a stabilizing pricing environment is encouraging, Flanders said. The analyst said he expects 2019 to be a strong launch year for the company.
Although Endo's valuation appears stretched in light of risks such as high-margin 505(b)2 product concentration and opioid uncertainty, Flanders said the risks are balanced against stronger operational performance and an improving generics environment.
Caution On Mallinckrodt
Mallinckrodt shares are trading well off their lows as Acthar trends stabilize. Goldman Sachs expects upside to consensus Acthar estimates for the second half of 2018.
The pipeline that includes VTS-270 and CPP-1X has risk, Flanders said. The analyst is cautious on Acthar into 2019 and in the long term due to the potential for the re-emergence of payor pressure and competitive threats.
Mallinckrodt has to effectively allocate capital to drive growth across its business, especially as its key products face competition beyond 2021, Flanders said.
The Price Action
Endo shares were down 0.81 percent at $15.99 at the close Tuesday, while Mallinckrodt shares slid 2.91 percent to $32.04.
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Crypto Whales Are Loading Up — Are You?
New research shows the biggest crypto buyers are back. And this time? They could hold for the possibility that Bitcoin will surpass $100,000 in 2024. You don’t want to miss the next massive crypto bull run like we saw in 2020 and 2021. To know exactly what’s going on and what to buy… Get Access To Benzinga’s Best Crypto Research and Investments For Only $1.