Tuesday, March 25, 2014

Has the Biotech Bubble Popped?

No, says Credit Suisse analyst Ravi Mehrotra and team, when contemplating the recent drops in Gilead Sciences (GILD), Biogen Idec (BIIB), Celgene (CELG) and their ilk. They explain why:

When looking at the overall picture, it is clear that the biotech bull markets of1999/2000 and 2013/2014 are notably different (now driven by an appetite for EPS growth vs. genomics/tech then, now valuation is arguably not stretched relative to other sectors). However, we also highlight that there are some similarities between this bull market and the last (generalist in-flows and preclinical public companies), which could drive some lingering market nervousness. In keeping with our (still standing) “generalist GARPy inflow hypothesis” we remain confident of the >25% large-cap biotech sector’s medium-term EPS growth rate (vs. high single-digit for the S&P500). In our view, unless we see a fundamental disappointment in the "leadership" companies, we think valuation of (at least the large caps within) the biotech sector is supported and actually provides room for upside. We note that if we see a further 10.5% decline in the stock across the large caps it would place the sector at 2015 PE parity to the S&P (with >4x the EPS growth). Large cap biotech is now trading at a 2015 and 2016 PE discount to the S&P500!

Mehrotra’s prefers Biogen Idec, Gilead Sciences and Celgene among large-cap biotech stocks.

Shares of Biogen Idec have dropped 1% to $309.37 today at 11:34 a.m., while Gilead Sciences has gained 0.9% to $72.74 and Celgene has advanced 1.5% to $143.55.

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