Biotech's Best

11/22/2013 8:00 am EST

Focus: STOCKS

Steven Silver

COO, Vision Financial Markets, LLC

S&P Capital IQ has a positive fundamental outlook for biotechnology over the next 12 months, based on accelerating revenue and earnings growth from several large-cap, profitable names in the group, suggests Steven Silver, S&P Capital IQ equity analyst in The Outlook.

In our view, Amgen (AMGN), Celgene (CELG), and Gilead Sciences (GILD) each has bolstered its long-term growth prospects in recent years.

Celgene, which had been reliant on its multiple myeloma drug Revlimid for the majority of its revenue, secured approval of internally-developed Pomalyst for late-stage multiple myeloma.

Its Apremilast is currently under Food and Drug Administration (FDA) review for the anti-inflammatory condition, psoriatic arthritis, and has also shown promise in such indications as psoriasis and ankylosing spondylitis.

In 2010, Celgene acquired rights to cancer drug Abraxane, which was approved in breast cancer at the time of the deal, but has subsequently been approved for lung and pancreatic cancer, the latter of which we view as a major advance in the treatment paradigm.

Celgene has been very aggressive in establishing alliances with smaller biotech companies, which we expect to provide future pipeline opportunities.

Gilead Sciences had also seen its growth outlook dim after several acquisitions failed to adequately diversify the company's revenue stream beyond its market-leading HIV/AIDS treatment.

However, in early 2012, Gilead closed on the $11 billion acquisition of Pharmasset, which delivered lead candidate sofosbuvir, which we think should secure FDA approval for hepatitis C before the end of 2013.

We view additional approvals as likely to follow, as part of combination regimens over the next few years, and we expect hepatitis C to emerge as a major long-term growth driver.

We also view Gilead's 2011 acquisition of Calistoga favorably, as lead candidate idelalisib has shown positive data for chronic lymphocytic leukemia and non-Hodgkin's lymphoma, and we view accelerated approvals as likely for this drug.

As such, we now view oncology as an emerging and complementary growth driver for Gilead as well. We expect adjusted EPS growth of 25% for Gilead over the next three years, driven largely by the expected launch of sofosbuvir.

Lastly, Amgen is the most mature and slowest growing of the large-cap names. However, strong cash flow generation enabled the initiation of biotech's first regular dividend policy in 2011.

To bolster growth, Amgen secured FDA approval of its denosumab franchise in 2010 for post-menopausal osteoporosis, as well as for cancer-related bone loss. In October 2013, Amgen acquired Onyx Pharmaceuticals (ONXX) to expand into the lucrative cancer treatment markets.

Onyx's key growth driver is Kyprolis, which was approved in 2012 for blood cancer multiple myeloma. While currently approved as a late-stage treatment option, Kyprolis is being studied extensively for a possible move into earlier lines of therapy, including in combination with Celgene's Revlimid.

We also see a potential growth driver in Amgen's monoclonal antibody candidate Evolocumab, a cholesterol-lowering drug currently in Phase III study.

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