It has been a tough slog for the biotech sector over the past six months. The space is an official bear market with the overall biotech indices down almost 30% from their last peaks of mid-summer. Myriad small-cap names have seen 50% or better declines primarily as sentiment has clearly gone into a "risk off" mode in the high beta sectors of the market.
That leaves many names trading at significant discounts to where they were in July and to their intrinsic valuations as well. That could change this week as stalwarts of the industry start the earnings parade. I expect most of the major players in the industry to beat expectations as per historical norm. Biogen (NASDAQ:BIIB) kicked off quarterly reporting season this morning. The company blew through both top and bottom line consensus and the shares are up some nine percent in trading at mid-day Wednesday.
I think solid earnings from this sector of the market could be just what is needed to trigger an overdue rally in this oversold area of the market. The giants of the sector also should be able to produce solid revenue and earnings growth in 2016 despite the challenging global backdrop. Few sectors of the market can say that right now.
So with further ado, here are three biotech stocks that could deliver positive catalysts in February. All are undervalued. Sticking with a cautious stance given the rocky start to the market in 2016, below are highlighted two cheap large-cap growth plays as well as a small-cap concern that is deeply oversold and has been the subject of recent buyout rumors.
AbbVie (NYSE:ABBV) reports this Friday. The company has beat bottom line expectations for each of the past four quarters and I expect the firm to do so again this quarter. The current consensus is calling for earnings of $1.12 a share on just shy of $6.4 billion in revenue. This would be better than a 25% increase in profits from the same period a year ago.
The company recently won a ruling at the patent office around its blockbuster drug Humira. Amgen (NASDAQ:AMGN) had asked this office to review two formulation patents on Humira - a rheumatoid arthritis drug with annual sales near $14 billion - with the argument that they shouldn't have been granted. This request was rejected unanimously by the three judge panel. This supports the company's view that this blockbuster drug will not face competition in the critical U.S. market until 2022, a view echoed by BMO Capital after the ruling.
Given Humira makes up over 50% of the company's current overall sales mix, obviously this is a crucial development and one not factored into the current stock price for AbbVie. I'm sure several analysts will confirm the impacts of this ruling on the conference call after earnings are released. The company is tracking to better than 30% year-over-year profit growth in FY2015. The consensus calls for 15% to 20% earnings gains in FY2016 on back of another revenue increase in the mid-teens. The stock is too cheap at just over 11 times forward earnings, especially given its almost four percent dividend yield.
Next up is Relypsa (NASDAQ:RLYP) which just got their first commercialized product "Veltassa" on the market. Veltassa is targeted at hyperkalima which is an approximate $2 billion annual market where there has not been a new treatment in around a half a century.
The company delivered additional good news to shareholders earlier in the week when it reported news from a DDI study that showed Veltassa does not bind with other drugs as feared. The FDA had approved the drug in late 2015 with a black box label that warned that it could bind with a variety of other medications making them less effective if taken within six hours of each other. This new study shows that Veltassa does not bind with the vast majority of these drugs even within three hours. These results will help Veltassa gain acceptance in this marketplace.
It also makes it more likely the company is acquired by a larger player which happened to its competitor ZS Pharma (NASDAQ:ZSPH) earlier in November. Astrazeneca (NYSE:AZN) acquired that firm with a substantial premium for $2.7 billion. I highlighted these buyout rumors around Relypsa and its potential as an acquisition in an article for SeekingA lpha Pro which comes off embargo this morning.
In addition, there was a solid piece this morning on Seeking Alpha on why Veltassa should garner the majority of the hyperkalima market even when competitors enter the space such as "ZS-9" from ZS Pharma in a quarter or two. The company has a ~$850 million market capitalization of which over $250 million is represented by net cash. The stock currently is at just over $20.00 a share. The median price target by the 10 analysts that cover the shares is $45.00 a share. Don't be surprised if Relypsa is no longer a standalone entity by the end of the first quarter.
Finally we have Gilead Sciences (NASDAQ:GILD) that reports on February 2nd. The company has blasted through quarterly estimates since it first rolled out its hepatitis C blockbusters of Sovaldi and Harvoni which now do nearly $5 billion in quarterly sales in the first half of 2014.
I expect this to happen again as declining sales in the U.S. as the sickest hepatitis C patients get treated are offset from accelerating sales in newer markets such as Europe and Japan. Expectations are for approximately $3.00 a share in earnings on just over $8.1 billion in sales.
The company has been pushed to diversify from its core market leading franchises in HIV and HCV. There should be a lot of questions on this subject from analysts especially given Gilead's recent large collaboration deal with Galapagos (NASDAQ:GLPG) which included an equity stake which Gilead recently up to just under 15% of the company. I also would not be surprised if the company also announced a significant dividend hike either this quarter or the next. Gilead should produce some $15 billion in free cash flow in FY2016, so it certainly can lift its dividend yield substantially from the current 1.9% level.
At just 7.5 times earnings, it would not take a lot of good news to get the stock moving from deeply oversold levels.
Disclosure: I am/we are long ABBV, AMGN, BIIB, GILD, RLYP.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.