S&P’s Buy-Rated Biotech

09/28/2016 9:00 am EST

Focus: STOCKS

S&P Global Market Intelligence’s positive fundamental outlook for the biotechnology sub-industry for the next 12 months reflects favorable prospects for new and novel therapies to reach commercialization, asserts global equity analyst Jeffrey Loo in S&P's The Outlook.

We forecast solid, yet moderating sales growth, following robust growth over the past three years.

We are encouraged by what we view as a strong period for the reporting of late-stage clinical results, and a more accommodating FDA for approvals.

In 2015, the FDA approved 45 new drugs, up from 41 in 2014 and 27 in 2013, and the most since a record 53 were approved in 1996.

Many of these newly approved drugs have significant commercial prospects and represent major advances in therapeutic areas such as cystic fibrosis, hepatitis C, multiple sclerosis, and cancer, by our analysis.

We expect wider adoption of biomarker research and genetic-targeted clinical studies to help bolster long-term research and development pipeline productivity.

In late 2012, the FDA introduced “breakthrough therapy” designations, intended to speed development of promising programs.

We expect a favorable M&A climate, as large pharmaceutical firms move to offset lost revenues from expiring drug patents and large biotechs bolster their drug pipelines amid maturing products.

We note an uptick in M&A speculation and announced deals recently. We also see large cap biotechs generating cash flows supporting larger scale acquisitions of their own.

We recommend that investors concentrate core holdings in established, profitable companies, as smaller biotechs tend to be more volatile.

We would seek companies with at least two years of operating capital and multiple pipeline drivers, as those with smaller pipelines typically suffer significant share price declines on an unfavorable outcome.

In 2015, the S&P Biotech Index rose 5.3% vs. a 1.0% decline for the S&P 1500. In 2014, the S&P biotech index rose 32.3%, vs. a 10.9% gain for the S&P 1500 Index. Year-to-date through August 12, 2016, the S&P Biotech Index declined 5.7%, vs. a 7.3% rise for the S&P 1500 Index.

Here are all of the 4 STAR (buy) and 5 STARS (strong buy) ranked stocks in this sub-industry:

AbbVie (ABBV), Alkermes (ALKS), Alnylam Pharmaceuticals (ALNY), Amgen (AMGN), Biogen (BIIB), BioMarin Pharmaceutical (BMRN) and Regeneron (REGN) each our 4 STAR buy rating.

In addition, Celgene (CELG) and Gilead (GILD) both earn S&P Global Market Intelligence’s highest investment recommendation of 5-STARS, or “strong buy.”

Subscribe to S&P The Outlook here…

By Jeffrey Loo, Analyst in S&P's The Outlook

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