Biopharma shares have outperformed the broader market year-to-date, giving rise to apprehension over whether a pullback is in the offing. An analyst at BofA Securities said Friday that now is the time to go from defensive to offensive in the sector, as quarantines are winding down in several parts of the globe.
The Biopharma Analyst
Analyst Geoff Meacham shortlisted Eli Lilly And Co (NYSE: LLY), Vertex Pharmaceuticals Incorporated (NASDAQ: VRTX), Bristol-Myers Squibb Co (NYSE: BMY), BioMarin Pharmaceutical Inc. (NASDAQ: BMRN) and Amgen, Inc. (NASDAQ: AMGN) as biopharma stocks where he would put his money to work.
The analyst has the following ratings and price targets for the shares:
- Lilly: Buy/$165
- Vertex: Buy/$300
- Bristol-Myers Squibb: Buy/raised the price target from $75 to $80
- BioMarin: Buy/lifted price target from $110 to $120
- Amgen: Buy/price target increased from $265 to $275
5 Reasons For BofA's Bullish Disposition
BofA is increasingly bullish on the biopharma group due to the following factors, Meacham said:
- Expectations for robust revenue growth of 6% in the second half of 2020 compared to the first-half, which is double that of the S&P 500's revenue growth.
- Reasonable price-earnings for the stocks in the sector.
- Many value-creating events lined up for the second half.
- Lower policy risk stemming from goodwill earned from the COVID-19 pipeline.
- A consistently positive FDA backdrop.
Q1 Earnings Get ‘A' Grade
All of the big biotechs and major pharma companies reported both revenue and adjusted EPS beats in the first quarter, with Lilly and Vertex even raising some parts of their 2020 guidance, Meacham said.
Citing slower new starts and forex headwinds, Bristol-Myers Squibb and BioMarin lowered their 2020 revenue guidance, but maintained their EPS guidance, the analyst said.
Meacham expressed surprise at Merck & Co., Inc. (NYSE: MRK) and Alexion Pharmaceuticals, Inc. (NASDAQ: ALXN) lowering their 2020 revenue and adjusted EPS guidance, given his belief that oncology or orphan diseases wouldn't be as sensitive to COVID-19 disruption.
Lilly One of The Higher Quality Stocks In BofA's Coverage
Lilly is a source of differentiated growth given its early product cycle and diversified base business, including diabetes, immunology and immunotoxicology and migraine, and an advancing late-stage pipeline of potentially best-in-class or first-in-class therapies, Meacham said.
The analyst said he likes Lily's potential for additional earnings growth in 2020-2021 and views Lilly as one of the higher quality stocks in his coverage despite its higher valuation.
The prospects for 2021 look attractive, with selpercatinib potentially launching in non-small cell lung cancer and thyroid cancer by year's end, and tirzepatide approval in 2021 representing a "step change" for the diabetes franchise, he said.
Consensus For Vertex To Move Higher?
Vertex has a richer — though well-deserved — valuation, due to its differentiated growth profile, Meacham said.
Given that Vertex's commercial execution is largely unaffected by the COVID-19 pandemic, the analyst said investors will begin to look forward to 2021 sooner than for other companies with more commercial risk.
BofA expects consensus estimates to continue to move higher, making Vertex's valuation even more attractive.
Bristol-Myers Has Highly Differentiated Growth
With an estimated 8% revenue growth and 19% EPS growth in 2021 compared to 5-6% and 12%, respectively, for peers, and with six new launches expected this year, 2020 is shaping up to be a very robust period for Bristol-Myers despite the ongoing COVID-19 headwinds, Meacham said. The analyst said the company's growth looks highly differentiated.
An increasingly diversified product mix and beatable launch expectations position the company for meaningful upside to consolidated P&L, with improving synergies, he said.
BioMarin's ‘Game-Changing' Late-Stage Pipeline
BioMarin's late-stage pipeline in valrox and vosoritide have improved its growth outlook, Meacham said.
The analyst termed the company's late-stage pipeline as "game-changing." The second-half launch of Roctavian is the most important catalyst for the company this year, with the product likely to accelerate the company's already above-average growth profile, he said.
"We see BioMarin as one of the higher quality names in our coverage universe given its clean growth story and it remains our SMid cap top pick."
Amgen Looks To New Product Growth To Compensate For Legacy Product Erosion
The long-term outlook for Amgen's Otezla is improving given the recently announced Phase 3 data for mild-to-moderate psoriasis, Meacham said.
The company rapidly refocused its story from legacy product erosion to new product growth with the acquisition of Otezla from the Bristol/Celgene deal, the analyst said.
"Since then Amgen's growth profile has only improved, led by an expanded addressable market for Otezla, outperforming Amgen Biosimilars and Evenity franchises, aggressive formulary negotiation for Aimovig, and an exciting pipeline in AMG 510 and tezepelumab looking to contribute as soon as 2021."
The Price Action
The iShares NASDAQ Biotechnology Index (NASDAQ: IBB) was last seen trading up 1.25% to 128.76, adding to its 5.6% year-to-date gain.