In November 2016, Mizuho’s Salim Syed initiated coverage of Amgen (AMGN), Celgene (CELG), Biogen (BIIB) and Gilead (GILD), as part of a comprehensive biotech sector initiation report covering all facets of the industry.
And when it comes to analyzing and investing in the biotech sector, he quickly makes apparent that a scientific background, while not necessary, can surely expedite the process. Luckily, he’s quick to lay out the context.
While the biotech sector has historically developed larger molecules and the pharmaceutical sector smaller molecules, the line is blurry. A boon to both sectors has been the increase in drug approvals over time, with 80-90% of all applications currently approved.
In fact, large-cap biotech currently trades at 12.1x earnings, a 30% discount to the S&P (as of February 3, 2017). The last time large-cap biotech even traded below the S&P was in 2011.
“Biotech has had an amazing run since 2009, up 600-700% until the July 2015 peak,” says Syed. However, recent events have caused a considerable pullback, with the industry currently down about 35% and P/E valuation at or approaching historical lows.
So, what have been drivers for this boon and break?
Bottoming Out Biotech
The industry’s initial demise began in July 2015 due to BIIB’s guidance revision, which was in turn exacerbated by August’s macro fears, including a China slowdown, lower oil prices and a possible Fed rate hike.
Media-grabbing statements and events have also proven influential in shaping a less than enthusiastic market sentiment. Among these include former Turing Pharmaceuticals CEO Martin Shkreli infamously raising the price of a life-saving drug from $13.50 to $750 overnight. Hillary Clinton’s tweet in response then sent the NASDAQ Biotechnology Index down another 4.5%.
The remainder of the year didn’t see much recovery with biotech down 25% overall as the presidential election intensified the drug pricing debate. At the same time, scientific advances did not prove abundant enough to overcome other concerns. As Mizuho’s Syed observes, “fundamentally there also hasn’t been much in terms of major clinical data in our view (at least for 2016).”
Science vs. The Bully Pulpit
The current state of affairs paints a cloudy picture for a traditionally sunny industry. An investor survey taken at November’s Mizuho Global Investor Conference in New York found that most expectations strongly favored biotech as the best-performing subsector in 2017. 85% of investors in the survey also voiced the opinion that biotech/pharma will outperform the S&P in 2017.
According to Syed, the industry’s historical lows are not necessarily without reprieve. He identifies three major factors that can turn around the market, positive clinical data, M&A and clarity on the political landscape.
In terms of positive clinical data, he believes that cancer and neurology have the most potential first-in-class projects. “Interestingly enough most of this growth is due to new brands and volume, not price – so even if pricing policies were to change, cancer would appear to still remain a high growth area.” Separately, there are a good number of Phase 3 catalysts this year.
M&A is also a particularly important industry catalyst to watch. “With valuations the way they are, M&A is on the table. There has been limited M&A in the US due to most assets being outside of the country, but that could change this year. We’ve already seen some of that occur, and a repatriation holiday would only help,” he points out.
The political context, as with all industries, seems less clear. There may be impending political volatility at any time due to the Trump presidential pulpit. But overall, he thinks that “it’s a good thing the presidential elections are now behind us. That was an overhang on the sector in 2016.”
Looking to 2017, all things considered, biotech appears to be a good bet within the healthcare sector.