Biotech stocks took a beating earlier this week, but some of them are getting a lift now, possibly due to a favorable report from Citi analysts. They question whether we’re in a biotech bubble because of how high many of those stocks have been driven before this week’s decline. However, they remain bullish on certain companies in the biotech industry.
Citi likes large-cap biotech companies
Analysts Yaron Werber, Jonathan Eckard, Kumaraguru Raja and Christopher Mortko note that valuations for companies within the biotech sector have been driven up because of generalist interest in the sector. They also point to “growing optimism for pipeline success, drug innovation and M&A deals.” The analysts said a pullback seemed inevitable, but they continue to like some companies which are developing innovative products and offering strong growth in revenue and earnings per share.
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They do note though, that drug development is challenging and advise investors to strike a balance between returns and appetite for risks. Currently they remain particularly bullish on large-cap biotech firms, although they’re cautious on SMID valuations.
Gilead, Celgene are the big large-cap winners
The analysts specifically name Gilead Sciences, Inc. (NASDAQ:GILD) and Celgene Corporation (NASDAQ:CELG) as the stocks they favor in the large-cap group. Shares of Gilead climbed as much as 5 percent on Thursday, while Celgene shares rose more than 3 percent.
They admit that the valuations of large-cap biotech companies aren’t cheap, but they believe that the valuations look reasonable because of the companies’ strong fundamentals and robust growth. They said because of how scarce growth stocks are in the overall market, they believe that Gilead Sciences, Inc. (NASDAQ:GILD) and Celgene Corporation (NASDAQ:CELG) will bounce back. And they certainly are. They expect that once worries about the fiscal cliff are resolved, the shares could perform even better.
Medivation, TESARO are the mid-cap winners
The analysts said the story is different for small- to mid-cap stocks because the valuations there are more broadly stretched. They suggest that Wall Street is “overly optimistic” of these companies’ chances for success. However, they’re not bearish on all small- to mid-cap biotech stocks. They like Medivation Inc (NASDAQ:MDVN) and TESARO Inc (NASDAQ:TSRO).
Shares of both rose on Thursday, with Medivation climbing 4 percent and TESARO rising 6 percent.
Biotech IPOs starting to cool
The analysts note that more than 30 biotech companies have held initial public offerings so far this year and that the offerings have had a strong run. On average, they’ve returned 93 percent from launch to peak share price. They said the average return from IPO debut to present is 36 percent.