Biotech Bull Market: 2014 Key Trends To Watch

by: Rod Raynovich

Biotech Bull Market Enters The "Bubblet" Phase in Early 2014

Buyers Anticipating J.P. Morgan Conference: the iShares Nasdaq Biotechnology ETF (NASDAQ: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.

Company Ticker Price Mark. 2013/'14 est P/S SE Cancer Disease Focus Ph.2,3 Market
6-Jan Cap$B Revenues $B 2014 $M Pipeline targets/technology
Biomarin BMRN 69.5 9.6 0.55 0.669 14.2 1,000 rare genetic disease cancers 2,1 4 products(enzymes)
Epizyme EPZM 36 1 0.06 0.06 17 ~100 oncogenes, NHL sarcomas 1,0 HMT inhibitor
Incyte INCY 55 8.4 0.35 0.50 16.8 29 myelofibrosis,pancreatic,solid tumors 11, 1 ruxolitinab (JAK)
Medivation MDVN 68.6 6.9 0.25 0.425 11.8 73.6 prostate,breast 4, 1 enzalutamide (TNBC)
Puma Bio PBYI 110 2.95 n/a n/a n/a 128 breast, NSCLC 3,1 neratinib (TKI) HER2
Pharmacyc PCYC 128 7.7 0.20 0.33 23.3 262 blood cancers 6, 0, ibrutinib (BTK)
SeattleGen SGEN 41 4.9 0.26 0.29 16.4 226 ADCs for lymphom,solid tumors 5, 4 brentuxamab (ADCS)
Onyx ONXX 125 9.14 0.634 0.876 8.7 n/a liver, kidney, colorectal 0, 9 now Amgen
Clovis CLVS 58.7 1.8 n/a n/a n/a 133 ovarian/ breast cancers, NSCLC,DX 2 EGFR, PARP

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

Company Ticker Price Mark. 52 Week % Up 1 yr.
8-Jan Cap$B High
Biomarin BMRN 69.5 9.9 80.7 34
Epizyme EPZM 35.5 1 45.7 52
Incyte INCY 55 8.4 55.3 193 NH
Medivation MDVN 68.6 6.9 69.8 25 NH
Puma Bio PBYI 110 2.95 113 474 NH
Pharmacyclics PCYC 128 7.7 143 97
SeattleGenet SGEN 41 4.9 49 54
Onyx now Amgen 125 9.14
Clovis CLVS 63.4 2.1 86 271

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 (MUTF: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.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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