Citi: Buy Celgene, Gilead, Biogen And Regeneron As Biotechs Recover

Citi’s Robyn Karnauskas said that while the fundamentals of large-cap biotech stocks remained intact, a full recovery could take time. He added, “We favor catalyst rich growth stocks in the recovery cycle [over value stocks].”

Analyst Robyn Karnauskas initiated coverage of the sector with four Buy ratings and two Neutral ratings, while mentioning that the group is “still attractive” and has “higher growth potential than S&P and pharma in the 2015-2018 timeframe.”

He added that the sector could generate 50 percent more EPS growth in next three years versus the S&P 500, while it is currently trading at a premium of only 20 percent.

Initiations

Top Picks

• Celgene Corporation CELG – Rated Buy, with a price target of $130.
• Gilead Sciences, Inc. GILD – Rated Buy, with a price target of $110.

Others

• Biogen Inc BIIB – Rated Buy, with a price target of $345.
• Regeneron Pharmaceuticals Inc REGN – Rated Buy, with a price target of $480.
• Alexion Pharmaceuticals, Inc. ALXN – Rated Neutral, with a price target of $165.
• Amgen, Inc. AMGN – Rated Neutral, with a price target of $165.

The main concern for biotech investors is drug pricing, Karnauskas said, while adding that the base businesses of Amgen and Biogen depend more on price increases than those of others. “If Medicare ever gets power to negotiate, we think REGN’s Eylea biz will be most impacted followed by GILD.”

The analyst commented that Alexion Pharma came out as the winner in both. He added that biosimilar news flow could increase in 2016, which would limit upside for Amgen’s shares.

“Gilead has the strongest base biz with strongest cash flow & beat potential,” Karnauskas wrote. There appears to be 15 percent upside from CMP for the company, with no pipeline followed by Amgen and Biogen, “which also at CMP are trading near base biz value.” The analyst noted, however, that even growth names are were not getting much credit to the pipeline.

Biogen has the most pipeline catalysts followed by Celgene. Biogen is “the stock to watch” in 2016 with potential for 65-85 percent upside by mid-2017. Celgene “has many mid-stage readouts & MS readout in ‘17 but investors may not give full credit in 2016,” the Citi report added.

Karnauskas expects 2016 to be “the turnaround story” for the biotech sector, since fundamentals remained intact and pipeline remained rich. He added, “The risk tolerance has reduced and most of the stocks are trading at no to very little value to pipeline, which will likely change as we see more data from pipeline readouts.”