Biotechnology
A Tough Act to Follow:
Biotech 2013 Outlook
After a strong 2012, we remain constructive on
biotech, but relative performance should moderate
in 2013. For larger cap biotech, valuation remains
supportive heading into 2013 despite recent
outperformance, and while 1H12 saw a broad SMiD
cap biotech rally, stock picking will be key in 2013.
2012 was a good year. Large cap biotech was
particularly strong versus the DRG (+3000 bps) and the
broader market (+2760 bps vs. the S&P500). Small and
mid cap biotech lost ground in 2H12, but still had a
strong year, outperforming the Russell 2000 by 780bps
and 2200bps respectively. Despite a broad 1H12 rally,
small and mid-cap biotech showed relatively typical
patterns with the top 5 and 10 performing stocks
accounting for 77-95% and 65-100% of full year returns.
Lucky 13. We remain positive on the group as a source
of innovation and growth. That said, we expect less
relative outperformance as the drivers of 2012
outperformance are intact but no longer novel heading
into 2013. Biotech’s macroeconomic insulation was a
positive in 2012, but sector rotation is a clear 2013 risk.
Large cap biotech outlook: We believe the group still
offers a compelling combination of valuation and growth
within large biopharma, and we maintain our Overweight
views on GILD (target to $88), CELG (target to $86),
ALXN and BIIB (target to $156). That said, major Phase
III catalysts are fewer as 2013 looks to be a pipeline
transition year ahead of a busier 2014+.
Small and mid cap biotech outlook: We see 2013 as
a more typical stock picking year and our ideas include:
NPSP (OW), CBST (OW), THRX (UW), and AUXL
(UW). Broader themes include: 1) M&A sentiment
should remain positive as large biopharma completes
several spin-offs, restructurings, and/or management
transitions and 2) investors may start to look further
down the cap curve given the perceived rapidity of
appreciation following positive news in 2012.