Leerink is recommending that healthcare investors, after a market-beating 2017, look for ways to keep up with what will likely be a strong broader stock market in 2018.
“We encourage use of higher-beta healthcare and cyclical subsectors, including emerging biotechnology and medtech, life science tools, and managed care,” writes director of research, John Sullivan.
“An FDA inclined toward approval and supportive of the use of expedited drug review pathways is likewise good news for shares of emerging biotechnology companies,” he added.
Among large cap biotech stocks, analyst Geoffrey Porges favors stocks of companies that are “structural demand growth stories, with products protected by commercial, scientific, clinical or legal barriers.” His top picks are Vertex (NASDAQ:VRTX), Alexion (NASDAQ:ALXN) and Regeneron (NASDAQ:REGN) for longer-term investment horizons.
Analyst Joseph Schwartz sees an overall positive regulatory and reimbursement landscape for small-and mid-cap biotech companies in his coverage universe as the FDA “pendulum” continues to swing in a favorable direction with more “flexibility” and payers find ways to eliminate wasteful spending in order to reimburse for orphan drugs.
“We expect drug developers to continue validating innovative technology in 2018 on the heels of encouraging gene therapy data and the cusp of CRISPR/Cas9 entry into the clinic,” Mr. Schwartz added.
He said companies with regulatory catalysts to watch include Arena Pharmaceuticals (NASDAQ:ARNA), DBV Technologies (NASDAQ:DBVT), Amicus Therapeutics (NASDAQ:FOLD) and Retrophin (NASDAQ:RTRX). His top picks are Amicus, Achillion Pharmaceuticals (NASDAQ:ACHN) and CymaBay Therapeutics (NASDAQ:CBAY).
Analyst Michael Schmidt expects oncology to remain an attractive area within his biotech coverage in 2018. Seven product launches, 12 pivotal trial results and eight pending regulatory decisions among late-stage oncology stocks that he covers make 2018 a catalyst-rich year, particularly in the first half. Among emerging earlier-stage companies, “we look for catalysts that could validate emerging technologies.”
Puma Biotechnology (NASDAQ:PBYI) and Clovis Oncology (NASDAQ:CLVS) are Mr. Schmidt’s top picks, followed by Incyte Genomics (NASDAQ:INCY) as a close third. Immunogen (NASDAQ:IMGN) and Karyopharm Therapeutics (NASDAQ:KPTI) are emerging small-caps that he thinks are attractive for 2018.
Analyst Paul Mattels writes that 2018 represents an important year for many of his CNS small-and mid-cap names that are poised to transition into commercial activities. Concurrently, high risk/high reward regulatory reviews also represent a theme in CNS, with Intra-Cellular Therapies (NASDAQ:ITCI) and Alkermes (NASDAQ:ALKS), while antisense/RNAi names enter catalyst-rich 2018 as some of the best performers during the past 12 months.
“We are in turn bullish on epilepsy stocks,” he said, citing top picks, GW Pharmaceuticals (NASDAQ:GWPH) and Zogenix (NASDAQ:ZGNX).
Alkermes and another top pick, Intra-Cellular, will test regulatory flexibility in CNS, while 2018 is likely to see the first-ever approval for an RNAi, Alnylam Pharmaceuticals’ (NASDAQ:ALNY) patisiran.
In medical supplies and devices, analysts Danielle Antalffy and Rich Newitter write that medtech valuations are elevated, but “we believe fundamentals remain stable and the sector is still an attractive one on a relative basis given solid free cash flow and strong balance sheets.”
While they don’t expect broad-based multiple expansion for the sector, they are most inclined toward high conviction upward estimate revision stories and/or GARP (growth at a reasonable price).
U.S. corporate tax reform should mostly be a positive for the sector through a lower corporate tax rate, but not for all, they added.
Ultimately in 2018, they prefer new product cycles/underappreciated market penetration stories set to drive above-average growth and estimate upside potential, and attractively priced sales growth/margin prospects.
Their top picks are Baxter (NYSE:BAX), Hologic (NASDAQ:HOLX), Dexcom (NASDAQ:DXCM), Insulet (NASDAQ:PODD), Intersect (NASDAQ:XENT) and Axogen (NASDAQ:AXGN).
