Biotech Companies Develop Strong Pipelines And Outperform Indices - Jim Birchenough - BMO Capital Markets Corp.
May 8, 2012 - The Wall Street Transcript has just published Biotechnology and Pharmaceuticals Report offering a timely review of the sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
Dr. Jim Birchenough is a Managing Director in the health care equity research group at BMO Capital Markets Corp. Based in San Francisco, Dr. Birchenough leads BMO coverage of the U.S. biotechnology sector. With more than two decades of experience as a Physician, pharmaceutical industry veteran and sell-side Analyst, Dr. Birchenough has covered a broad range of small-, mid- and large-cap biotech companies. He has an emphasis on clinical discovery and emerging technologies and companies, and is highly rated in various investor surveys. He holds a postgraduate medical residency and a medical doctorate from McMaster University and a B.S. in physiology from McGill University.
TWST: What is it about the midcap space that has you so optimistic on the emerging-products angle?
Dr. Birchenough: We're excited about the record number of product approvals that we've had over the last 12 to 18 months. We have seen a dynamic where there has been a bias toward shorting new product launches because of the time it takes to typically gain traction with novel drugs, but we're at a point in time where we think that some of the slower launches last year will start to accelerate, and we've seen some more recent launches, with Regeneron (REGN) as a good example with their drug Eylea, where the launches have come out very quickly. We think we'll see both acceleration of launches from last year, and some more promising launch activity this year.
TWST: When you look at the areas you are targeting, how have the stocks performed? There is a lot of talk about biotech being a more mature and more profitable sector.
Dr. Birchenough: The U.S. biotech sector has outperformed the broader indices over the last two years, the last year and the last six months. We've seen strong performance across the board in small-, mid- and large-cap biotech. On the small-cap side, we've seen companies like Ariad (ARIA) that have roughly doubled on positive data for development-stage drugs. We've seen companies like Regeneron, a midcap company, more than double on a strong launch of their eye disease drug Eylea. And we've seen large-cap companies, like Celgene (CELG), recover from historic lows on prospects for longer-term sustainable growth. So we're seeing strong performance across the board, and it's resulted in pretty dramatic outperformance of the group relative to the broader indices.
TWST: Where do we go from here? What's your broadbrush outlook for the sector? It sounds as if you're pretty bullish.
Dr. Birchenough: We're very bullish on prospects for the U.S. biotech group. We expect the group to outperform the broader market over the next six to 12 months. The feedback we get from investors as we talk to them is that there is, if anything, a hope that there will be a pullback to provide another entry point for the next run in these stocks, something that would create a bit of a floor. So there seems to be a bias on the part of our clients to own U.S. biotech, and we do think that there are some attractive opportunities out there in the space.
TWST: Where are you pointing investors now? What are some of your favorite stories?
Dr. Birchenough: Our top small-cap picks are Ariad and Rigel (RIGL). Our top midcap picks are Amylin (AMLN), Regeneron and Onyx (ONXX) . And our top large-cap picks are Celgene and Gilead (GILD).
TWST: Let's start with the large-cap segment. What separates Celgene and Gilead from the rest of the pack?
Dr. Birchenough: In both cases, we think there is a dislocation between their multiples and their long-term growth prospects. In the case of Celgene, we have a stock trading at roughly 14 times forward earnings, with an earnings CAGR in excess of 20% through 2015, and an earnings CAGR that we think will accelerate beyond 2015. We think the catalyst for the multiple re-expanding for Celgene will be expanded labeling for their myeloma drug Revlimid in Europe, and we expect over the next month or so for the EMA to grant front-line approval for Revlimid maintenance in patients with myeloma. We think that that will support an acceleration of long-term growth and a re-expansion of the Celgene multiple.
TWST: We touched on Ariad quite a bit. Please tell us a little bit more about Rigel.
Dr. Birchenough: Rigel has a late-stage drug in Phase III, an oral drug for rheumatoid arthritis. Rigel is partnered with AstraZeneca (AZN) with their drug, Fostamatinib, which is the first oral Syk inhibitor for patients with moderate-to-severe rheumatoid arthritis. We think that this drug will be differentiated not only from the anti-TNF drugs that are injectable, but also from other oral drugs like Pfizer's (PFE) Tofacitinib. We expect positive Phase III data to be reported by year end, which could support a global opportunity in excess of $2 billion in sales. Rigel receives an escalating royalty starting at 20% and going north of 30%.
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