No, the Biotech Rally Isn’t Over

After big rallies by biotech stocks, the folks at Weeden wondered if the rally getting overdone. UBS analyst Matthew Roden and team think biotech stocks like Gilead Sciences (GILD), Celgene (CELG), Vertex Pharmaceuticals (VRTX), Puma Biotechnology (PBYI) and Achillion Pharmaceuticals (ACHN) can keep running. They explain why:

 

Despite recent sector performance, we believe the drivers of biotech outperformance are still relevant into YE2014.

[1] We continue to think numbers are beatable in large cap this year. None of our models look stretched, and in our view there appears to be plenty of room to beat (particularly for Gilead Sciences), which we think can continue to drive numbers higher. [2] We also think multiple expansion can be driven by pipeline catalysts this fall, including Celgene's GED-301, initial data for Gilead Sciences’ simtuzumab in cancer (where expectations are non-existent, in our view), and 7-day data for Achillion Pharmaceuticals’ nuc in HCV. [3] We are more bullish on M&A given the inflection of cash flows in large cap, coupled with the need for large cap to address toughening growth comps by 2016-17, and because mid-cap shave done a good job in value creation through de-risking of valuable assets. We expect Puma Biotechnology to be top of the list for bolt-on growth…

Favorites into YE14: Celgene, Gilead Sciences in large cap; Vertex Pharmaceuticals, Puma Biotechnology, Achillion Pharmaceuticals in [small- and mid-cap biotech stocks:] Amid low expectations, we think both Celgene and Gilead Sciences could see $5-10 upside if pipeline readouts described above are convincing. We see compelling risk-reward in Vertex Pharmaceuticals shares considering upside/downside scenarios, and we surmise it is under-owned in large cap growth portfolios. We think Puma Biotechnology is still undervalued, has several catalysts, and is a top takeout candidate. We see asymmetric upside potential in Achillion Pharmaceuticals if its nuc is safe and potent in 7-day treatment data, which would drive Achillion Pharmaceuticals’ strategic value higher.

Shares of Gilead Sciences have gained 44% this year after rising 0.8% to $108.41 at 11:04 a.m. today, while Celgene has advanced 13% after gaining 0.6% to $95.54. Vertex Pharmaceuticals has fallen 0.3% to $93.35 today, while Puma Biotechnology has ticked up 0.2% to $261 and Achillion Pharmaceuticals has jumped 4.2% to $12.06.