Today, J.P. Morgan analyst Cory Kasimov is out with a positive bet on the Biotech sector for 2018. In reflecting upon the year that has come to pass, though Kasimov recognizes substantial beats over the S&P, on the whole, the Biotech group merely is set to close out the year aligning with the market as a whole. Yet, “the force is strong with Biotech,” cheers the analyst, who pinpoints new optimism for M&A in the year that waits ahead.
Glancing to 2018, the analyst predicts: “We believe key fundamental drivers are solidly in place, highlighted by impressive innovation, a constructive FDA, and healthy capital markets. That said, M&A may be an increasingly important lever for a restoration of positive fund flows and broad upside; the possibility of repatriation could be yet another trigger on that front. Whatever the ultimate impetus, we believe it will be important for generalists to return to the space for the group as a whole to work. Otherwise, the Dark Side may reign.”
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After polling buyside, the analyst believes the results further back his positive sentiment on the Biotech group, with 66% calling for outperformance against the broader markets and 84% angling for an upturn in M&A come 2018.
However, Kasimov is not blind to headwinds that threaten the group as well, noting that even with a downturn in drug pricing media buzz this year, both he as well as the buysides he surveyed keep noting payer as well as pricing pressure as a prospective headwind for next year. Meanwhile, “the risk of government intervention remains an open question,” the analyst understands.
What has been a “turbulent” third quarter earnings season to say the least will not hold back the big biotech giants, as Kasimov believes, “Large caps look well positioned overall with relatively depressed multiples for the big 4.” Generally, the analyst finds Street expectations able to be met, especially on back of forthcoming new product cycles. Between a variety of clinical catalysts on both the short-term as well as immediate-term “horizon” coupled with M&A, which “could prove to be an important lever for the large caps as well, as they attempt to backfill pipelines and find new sources of growth,” Kasimov is confidently backing the Biotech sector.
Regarding SMID caps, the analyst anticipates “impressive innovation” will carry on as an important advantage along with a regulatory environment that has become “increasingly constructive.”
M&A has not transpired as a game changer just yet for Biotech, but Kasimov asserts that it “nevertheless remains a potential core driver in 2018 given a perfect storm of plush balance sheets (further bolstered by repatriation), attractive targets, and need.”
As core sector fundamentals continue to be robust and pricing fears are abating, Kasimov concludes that “the stars may finally be aligned” for a much-needed rise in M&A activity; otherwise, the analyst warns investors may grow impatient, and sentiment will fall. Overall, Kasimov is banking on M&A stars over investor frustration approaching the new year.
Related tickers: iShares Nasdaq Biotechnology ETF (IBB), SPDR S&P Biotech (XBI), NASDAQ Biotechnology (NBI), Biogen (BIIB), BoMarin (BMRN), Gilead Sciences (GILD), Shire (SHPG), Teva Pharmaceutical (TEVA), Valeant (VRX), Allergan (AGN), Ironwood (IRWD), Celgene (CELG), AstraZeneca (AZN), Synergy Pharmaceuticals (SGYP), Agile Therapeutics (AGRX), Calithera (CALA), GlycoMimetics (GLYC), bluebird bio (BLUE), Juno Therapeutics (JUNO), TransEnterix (TRXC), Opko Health (OPK), ACADIA Pharmaceuticals (ACAD)