Biotech on a "hot streak"
IBD INDUSTRY THEMES
Biotechs On A Hot Streak, And Could Be 'Cooking With Gas'
 Biotechs have climbed up the stock charts in recent weeks. (Paulista/stock.adobe.com)
ALLISON GATLIN4:14 PM ET
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These are salad days for the biotech sector, as a number of industry leaders are hitting new highs and the group as a whole is near the top of its game in terms of stock performance.
Autoplay: On | OffStock inflows hit $1.6 billion over the last four weeks, and there have been a number of clinical trial successes and a new industry-friendly Food and Drug Administration regime is in place.
As a result, Investors Business Daily's 439-company Biotech industry group has clawed its way to No. 4 out of 197 groups tracked by IBD from sixth just last week. Shares look likely to close at an 18-month high on the stock market today. And that's before a slew of earnings next week.
"Just about everything that could be going right for biotech lately has been going right," Brad Loncar, chief executive of Loncar Investments, told IBD on Friday. The onslaught of biotech earnings next week could really give investors some fodder, he said.
But there's one thing missing, says Loncar: mergers and acquisitions.
"If that last piece fits into the puzzle, then the biotech sector could really be cooking with gas," he said.
Gilead Sciences ( GILD) is the likely linchpin. Loncar calls Gilead the "poster child" for a large biotech that needs to do a deal. In 2016, Gilead's multibillion-dollar hepatitis C drug franchise toppled for the first time. Now, Gilead says it's interested in a deal in the cancer space.
Though some analysts have keyed in on Vertex Pharmaceuticals ( VRTX) as a smart acquisition, Loncar sees Gilead as more likely to buy an early cancer asset — something it can develop and commercialize, rather than putting its money to work on buying a developed revenue stream.
Vertex is already a hugely successful biotech in its own right, he said. Earlier this year, Vertex delivered the best news this year in the space, he pointed out. It had "exceptional results" in Phase 1 and 2 trials looking at a triple-pill to treat cystic fibrosis. The stock gapped up nearly 21% on Wednesday.
IBD'S TAKE: Rare disease and cancer plays have been front and center in the biotech sector as of late. Could these cutting-edge firms keep the rally going? Head to the Industry Snapshot for a deeper dive.
"That's a multibillion-dollar stock," Loncar said. "When a company like Vertex goes up 20%, that's something everybody in the stock market notices."
Biotechs Rise On EarningsGilead is set to report its second-quarter earnings Wednesday. But it will be sandwiched among a slew of strong contenders in the biotech space including Celgene ( CELG), Amgen ( AMGN), Biogen ( BIIB) and Alexion Pharmaceuticals ( ALXN).
No. 1 biotech Celgene is slated to report its second-quarter earnings before the open Thursday. The stock has an IBD Composite Rating of 99, leading its 438 peers and is sitting at a high last seen in July 2015.
Leerink analyst Geoffrey Porges says Celgene and Alexion will be bellwethers for the group this time, in the same way Dow's Johnson & Johnson ( JNJ) is often seen as a proxy for the pharmaceutical group. He calls for Celgene to beat and raise, and for Alexion to rise by topping low views.
Alexion is slated for Thursday. On Tuesday, Amgen could overtake a four-month high and jump to a record high if its second-quarter earnings report proves strong. Shares broke out of a cup-with-handle on July 13 at a 175.55 buy point and still remain in a buy zone.
This trio could help catapult the sector, analysts say. Meanwhile, on the pharma side, investors will key in to AstraZeneca ( AZN) early Thursday. In recent weeks rumors have emerged that Chief Executive Pascal Soriot could jump ship for Teva Pharmaceutical ( TEVA).
Loncar notes that the timing of those rumors were bad for AstraZeneca. AstraZeneca is set "any day now" to report the results of an immuno-oncology combination trial in lung cancer. Lung cancer treatment is a huge commercial opportunity and AstraZeneca is taking on players like Merck ( MRK) and Bristol-Myers Squibb ( BMY).
"Regardless of these rumors and controversy, I do think it's not an overstatement to say Pascal Soriot's job is on the line with (the trial) because this is make or break for AstraZeneca," he said. "This study is the most important thing for AstraZeneca in the last 10 years."
How Far Can They Run?Though biotech stocks are up 22.5% for the year, there's still room to run, CFRA Research analyst Jeffrey Loo told Investor's Business Daily. Valuations hit historic lows in 2016 amid the presidential election, and are still below both the S&P 500 and the overall health care sector.
"Relative to historical valuations, the biotech sector is still attractively priced," he said.
In late June, the sector got a massive push after President Donald Trump released a draft proposal on drug pricing. The initiative didn't include much to really tug down on drug prices, Loo said. He didn't credit the entire gain to the proposal, but it certainly helped, Loo said.
Clinical trials, near-term FDA approvals and strong launch trends have also helped prod the sector this year including the cystic fibrosis news from Vertex, a gene therapy from Novartis( NVS) and a Duchenne muscular dystrophy drug from Sarepta Therapeutics ( SRPT).
On the latter development, Loncar says Sarepta's $13 million second-quarter sales beat for Exondys 51 could bode well for the broader sector. Sarepta also raised guidance for the year which most analysts have called conservative.
"Everybody was watching that for a sign as to how drug launches are going and how payors are pushing back on things," he said. "The fact the launch (of Exondys 51) is going well is a good sign not just for Sarepta, but for all biotech companies."
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