Despite attractive valuation plays among large-cap biotechnology companies — of which Gelgene (CELG) has emerged as a prospect trading roughly at 13 times forward earnings, with the ability to grow earnings long term at a rate of 20% to 25%, according to Dr. Jim Birchenough, Managing Director & Senior Biotechnology Analyst at BMO Capital Markets Corp. — innovation remains a way to parse through smaller companies with uncertain ways to determine true value.
On the large-cap side, Gilead Sciences(GILD) continues growing its legacy franchise in HIV, and it continues updating its life-extension products. Dr. Birchenough says “beyond that, we think that they are in the leadership position in terms of the next big area of antiviral therapy, and that is hepatitis C, and we think that they have the best-in-class direct antiviral for hepatitis C in their drug GS-7977. And ultimately, we think that that will be a significant growth driver for the company over the next decade, and where we’ll have Phase III data next year that we think will establish a substantial lead over other companies in the hepatitis C space.”
On the midcap side, he has Onyx Pharmaceuticals (ONXX) as his top pick, and he says its three cancer drugs give it an edge. Maxivar is already partnered with Bayer (BAYN.DE); carfilzomib, a “best-in-class” drug, has been approved for myeloma; and Regorafenib is expected to be approved by year’s end. “Onyx has a rare combination of product diversification, commercial-stage opportunity and the prospects for sustained earnings growth that should attract investment,” Dr. Birchenough says.
On the small-cap side, Dr. Birchenough mentions Synta Pharmaceuticals (SNTA) as a name that will do well over the next 12 months. “Synta is a development-stage company moving into Phase III with what’s called an Hsp90 inhibitor, and Hsp90 is a chaperone, essentially a bodyguard, for key oncogenic proteins in cancer cells, and by targeting Hsp90, you could get different drivers of cancer growth in different tumor types. And this is a highly leverageable platform where Synta is studying the drug in 20 different trials and where we think they’ve got a best-in-class drug in this Hsp90 space,” he says.
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