Biotech investing is risk-fraught, but for investors who make the right bets, the returns can be staggering.
As the year draws to a close, Morgan Stanley said stock selection is the key to biotech investing in 2020 as drug pricing and election fears wane, offering incremental upside for innovators.
The Analyst
Matthew Harrison has the following ratings and price targets for the stocks under his coverage:
Bullish
- Amgen, Inc. AMGN 0.15%: Overweight, $280 price target
- Vertex Pharmaceuticals Incorporated VRTX 0.33%: Overweight/$250
- Alector Inc ALEC 3.14%: Overweight/$27
- Fulcrum Therapeutics Inc FULC 6.56%: Overweight/$29
- Sarepta Therapeutics Inc SRPT 2.41%: Overweight/$160
- SAGE Therapeutics Inc SAGE 1.09%: Overweight/$125
- Radius Health Inc RDUS 0.38%: Overweight/$36
- Ultragenyx Pharmaceutical Inc RARE 4.07%: Overweight/lowered the price target from $76 to $73
Bearish
- Ionis Pharmaceuticals Inc IONS 1.12%: Underweight/$48
- MacroGenics Inc MGNX 1.1%: Underweight/$6
- Innoviva Inc INVA 0.84%: Underweight/$8
The Thesis
The macro themes for 2020 are likely to be use of cash by large caps, trends in innovation and drug pricing/election risk, the same as in 2019, Harrison said in a Tuesday note.
Yet investors are becoming more comfortable with the potential political risks, which is likely to reduce the potential of these risks to create volatility in the sector, the analyst said.
Large-Cap Picks
Among large-cap biotechs, the analyst said he is focusing on growth over value, with Amgen and Vertex being his key calls.
Harrison said he sees multiple expansion and positive earnings revisions for Amgen due to a renewed growth outlook, conservative guidance and pipeline optionality.
Vertex stock is headed higher in 2020, he said, propelled by a robust launch of triple combo cystic fibrosis drug Trikafta and positive Alpha-1 antitrypsin deficiency data.
SMID-Cap Stocks Poised To Outperform
In the SMID space, the analyst likes Alector due to expectations that the Phase 2 dementia data will be a key derisking event.
Harrison sees Fulcrum as a key undervalued SMID with pivotal data in a rare muscle disease with $1-billion potential in the third quarter of 2020.
For Sarepta, the analyst said pivotal DMD gene therapy data should derisk the bull case.
Harrison is positive on Sage on the premise of a return to positive Phase 3 data for major depressive disorder and Phase 3 readouts due in 2020.
Ultragenyx is underappreciated, the analyst said.
Morgan Stanley expects continued expansion of Crysvita in Latin America, the launch of UX007 and advancement of the gene therapy programs to drive the stock in 2020.
For Radius, Harrison forecast stock outperformance due to sustained performance of its osteoporosis drug Tymlos and increased visibility into the Phase 3 study of the abaloparatide patch.
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