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Rod Raynovich, Raygent (41 clicks)
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Biotech Bull Market Enters The "Bubblet" Phase in Early 2014

Buyers Anticipating J.P. Morgan Conference: the iShares Nasdaq Biotechnology ETF (IBB) is up 2.4% YTD

Last week we started a series of articles that will follow key technical and fundamental trends in the biotechnology bull market. Trend # 1 was performance of funds and ETFs and the "FAB Five" large caps:

Amgen Inc. (AMGN), Biogen Idec Inc. (BIIB), Celgene Corporation (CELG), Gilead Sciences, Inc. (GILD) and Regeneron Pharmaceuticals, Inc. (REGN).

All the above stocks are on our focus list except CELG.

Our Key Trend #2 is performance of "Emerging Growth Stocks" in cancer therapy. These mid-cap stocks have been market leaders and are widely owned by institutional investors. They were up big in 2013 anticipating product approvals, sales growth or even a buyout. Our benchmark valuation is Onyx Pharmaceuticals which was acquired by Amgen for ~$10B. Onyx revenues were forecasted in the $900M range for 2014 so the Company was valued at about 10X sales. As valuations of biopharmaceutical stocks approach the $10B range an acquisition becomes less likely because few large cap pharmas or biotechs can afford it. Even a $5B market cap requires a blockbuster product and meteoric sales growth. So our key assumption for Trend#2 is that mid-cap biopharmaceutical stocks in the $5-10B range are benchmarks for overall bull market momentum and ultimately pipeline value.

Here are metrics, stock performance and pipeline overview for some "Emerging Growth Stocks" that have strong momentum.

CompanyTickerPriceMark.2013/'14 estP/SSECancer Disease FocusPh.2,3Market
6-JanCap$BRevenues $B2014$M Pipelinetargets/technology
BiomarinBMRN69.59.60.55 0.66914.21,000rare genetic disease cancers2,14 products(enzymes)
EpizymeEPZM3610.06 0.0617~100oncogenes, NHL sarcomas1,0HMT inhibitor
IncyteINCY558.40.35 0.5016.829myelofibrosis,pancreatic,solid tumors11, 1ruxolitinab (JAK)
MedivationMDVN68.66.90.25 0.42511.873.6prostate,breast4, 1enzalutamide (TNBC)
Puma BioPBYI1102.95n/a n/an/a128breast, NSCLC3,1neratinib (TKI) HER2
PharmacycPCYC1287.70.20 0.3323.3262blood cancers6, 0,ibrutinib (BTK)
SeattleGenSGEN414.90.26 0.2916.4226ADCs for lymphom,solid tumors5, 4brentuxamab (ADCS)
OnyxONXX1259.140.634 0.8768.7n/aliver, kidney, colorectal0, 9now Amgen
ClovisCLVS58.71.8n/a n/an/a133ovarian/ breast cancers, NSCLC,DX2EGFR, PARP

Here is the 2013 stock performance and metrics for the same stocks. Pharmacyclics (PCYC) and Seattle Genetics (SGEN) are on our focus list.

CompanyTickerPriceMark.52 Week% Up 1 yr.
8-JanCap$BHigh
BiomarinBMRN69.59.980.734
EpizymeEPZM35.5145.752
IncyteINCY558.455.3193NH
MedivationMDVN68.66.969.825NH
Puma BioPBYI1102.95113474NH
PharmacyclicsPCYC1287.714397
SeattleGenetSGEN414.94954
Onyxnow Amgen1259.14
ClovisCLVS63.42.186271

We caution anyone trying to fathom valuations of emerging biopharmaceutical stocks. As can be seen with Epizyme, Puma and other "mid-caps", price to sales may not be a good metric in a momentum market . Many high fliers are off their Q4 highs proving that it can be difficult to predict FDA approval and revenues for a Phase 2 drug with 4 years to go .The sector is still strong in early January with ETFs and the Fidelity Select Biotechnology Fund (FBIOX) hitting new highs, anticipating news and analysis from the J.P. Morgan Healthcare Conference on January 14. All of our portfolio picks are strong holds and we have added new stocks in the last 30 days.

Stay tuned.

Source: Biotech Bull Market: 2014 Key Trends To Watch

Additional disclosure: I am long FBIOX, Fidelity SelectBiotechnology Fund and trading short positions as a hedge.