The aftershocks from Brexit continue to roil the markets, with the Dow down triple digits in morning market action. RBC analyst Michael Yee makes an argument that biotech stocks could benefit. The iShares Nasdaq Biotech ETF (IBB) fell more than 5% Friday with the news that the U.K. voted to bail on the European Union and dropped another 1.7% today to just below $245. The fund is down 32% over the past 12 months.
Yet Yee says the risk/reward scenario for the sector may have improved with continued economic and political uncertainly battering the broader market.
We could make an argument that Brexit might be positive for biotech stocks and better risk/reward because if economic and political uncertainty continues to weigh on the overall market, then:(1) healthcare and biotech should see less economic uncertainty than other sectors (i.e. higher earnings visibility for healthcare) and a defensive rotation could be in play “shifting money flow” to healthcare and out of more economically sensitive groups until we know more, thus selling riskier sectors and buying less risky earnings sectors, (2) biotech has very low exposure to UK (1% of revs on average) and not that much to the Euro (20% of revs on average, i.e. half of their OUS revenues which are about 20-40% on average) and they also hedge currency; see exposures on page 2 from our note on Friday (AMGN and BIIB have the least OUS exposure) (3) politicians could be less focused on drug pricing – and more focused this summer on what Brexit means for various countries and the US and the economy and immigration will likely be more important topics. Thus if biotech stocks are trading towards the bottom end of their historical 12-25x multiple over the last decade, then risk/reward of biotech probably got better, not worse if other sectors’ earnings visibility becomes more challenging.
Yee does offer a “flip side,” citing currency exposure, delays in pricing reimbursement and investors selling off “higher risk” assets, such as biotech.
CELG – continue to like this name, REMARC expectations keep coming down, we think GED-0301 interim futility will be fine (mgmt wants to tell docs the drug is working and speed enrollment); BIIB – getting increasing call volume on this one…..at $229 we think this stock is near its “zero pipeline” value of $225 as investors have been struggling what to do after LINGO disappointment; we think it keeps getting more attractive and Q2 earnings should be fine…we don’t see 6/29 Eisai R&D day as much of a catalyst and low expectations on BAN2401 upcoming Alzheimer’s interim; VRTX – questions on risk/reward on triple data coming soon but that’s much better at $82 level; the Orphan stocks were hit Friday on Brexit due to perception of OUS and currency exposure risk (VRTX 40-50% Kalydeco is OUS; ALXN 65% sales OUS, BMRN 50%+ OUS); some investor worry on EU reimbursement timing and pricing so bulls have to stick with a 12m thesis on triple and keep the thesis through short-term uncertainty; BMRN – hit on OUS exposure/currency recently and perception of no short-term catalysts; our conversations w/ mgmt suggest July 27th hemophilia update will show good data and more pts well into “double-digit” Factor 8 production…the “backup” program mgmt spoke about might be used because the first one is “too potent” which would be ironic…AMGN – good defensive name – waiting on REGN injunction decision within 1-3 months, and recent questions are on biosimilar Enbrel panel from Sandoz coming July 13th…(AMGN Humira biosimilar panel is July 12th). GILD – most defensive at 7x multiple; the sentiment on GILD has swung from most loved biotech in 2013-15 to the one that fund managers on “the least” in meetings now….we want them to take a “String of Pearls” BD approach.
FYI: Some Big Biotech names are far more exposed to foreign currencies than others, according to Yee. Vertex, for instance gets more than 50% of sales from outside the U.S., while Biogen relies on foreign markets for 20% to 25% of its top line. But in many cases, exposure to the U.K. is limited. BioMarin, for instance, gets less than 5% of its sales from the U.K.
In recent market action, BioMarin fell 2.3%, making it today’s big loser. Biogen dropped 1.5%, followed by a 1.3% drop by Gilead. Celgene fell 1% today to $95.36, while Amgen and Vertex each fell 0.7%.