Big Gains Expected For Biotech Stocks In 2013
Biotech stocks delivered outstanding performance for investors in 2012. After a difficult 2011, biotech stocks took off in January 2012 and never looked back.
A quick look at the following chart tells the whole story.
As you can see, the Nasdaq Biotechnology Index climbed from just 1,084 in January to 1,430 by the end of December. That’s a stunning rise of 32% for the year.
Not too shabby!
However, biotech stocks’ heady gains are even more impressive when you compare them to the major market averages. In 2012, we saw gains of just 7.2% for the Dow Jones Industrials, 13.3% for the S&P 500, and 13.6% for the Nasdaq Composite.
In other words, biotech stocks more than doubled the returns of the S&P 500 and Nasdaq indices last year. And they beat the return on the Dow Industrials by a greater than four to one margin.
No question about it, 2012 was a great year for biotech stocks. But now that 2012 is safely in the books, our focus turns to what’s in store for the industry in 2013.
And so far, we like what we see!
Analysts at JP Morgan recently issued a bullish outlook for biotech stocks in 2013.
While acknowledging that biotech stock multiples have increased from 13x to 16x, the analysts said biotechs will continue outperforming this year. They base their positive outlook on strong industry fundamentals and a favorable FDA environment.
In addition, they believe the biotech industry will likely exceed relatively low revenue growth expectations of 8%. A number of high-profile drug launches this year should help boost industry sales in their opinion.
The analysts also see a number of upside catalysts for biotechs this year. They pointed to “a lot of meaningful phase 3 results on the near-term horizon.”
But what good is an industry outlook without some actionable trading ideas?
Fortunately, the analysts provided the names of their favorite biotech stocks for 2013 as well. These include Gilead Sciences (GILD), Vertex Pharmaceuticals (VRTX), Medivation (MDVN), Onyx Pharmaceuticals (ONYX), BioMarin (BMRN), and Orexigen Therapeutics (OREX).
GILD and VRTX are the analysts’ favorite large-cap biotechs, and MDVN is their top mid-cap. According to the report,
“All three companies have a significant number of value-creating events in 2013 including: 1) data from multiple phase 3 trials of Gilead’s GS-7977 in hep C, which we expect to support a robust regulatory filing in the US and Europe and a launch in early 2014, 2) data from several phase 3 trials of Vertex’s Kalydeco in cystic fibrosis (CF), which should expand its current label, as well as additional phase 2 data in the larger F508del CF population, which should increase confidence in the probability of phase 3 success in this population, and 3) a very robust launch of Xtandi in castration resistant prostate cancer, as well as label-expanding phase 3 data in pre-chemo PC (PREVAIL study) and other phase 2 data in early stage PC.”
In the mid-cap space, the analysts’ prefer ONXX and BMRN while OREX is their favorite small-cap biotech.
“In our opinion, ONXX is uniquely positioned with 3 approved oncology products, and we believe Kyprolis and Stivarga both offer upside to current 2013 expectations. We believe BMRN has one of the more compelling combinations of tangible commercial value and pipeline optionality, and we anticipate the substantial de-risking that took place in 2012 (GALNS) will drive increased generalist interest in 2013. On the more contrarian side, we’d like to have some obesity exposure. We also like VVUS on the mid-cap side, and OREX offers some shielded leverage to the Qsymia launch as well as its own high-probability clinical event (interim LIGHT CV data).”
I think the JP Morgan analysts are spot on with their views on these biotechs. However, I suggest you take a closer look at each one before adding them to your own portfolio.
Of course, if you’re not comfortable investing in individual biotech stocks, you can always go with a biotech ETF.
The SPDR S&P Biotech ETF (XBI) invests in US biotechs of all sizes and carries a lower than average expense ratio of 0.35%. It’s gained over 71% in the past three years. And if the JP Morgan analysts are correct in their outlook, XBI could be off to the races in 2013.
Profitably Yours,
Robert Morris
Category: Stocks
