- Biotech earnings season kicks off week of July 21st
- 5 of top-10 report this week
- Stocks pricing in higher expectations than in Q1
- Recent Fed Comments may weigh on sector
- Video Below
Biotech earnings season for Q2 gets underway this week with 5 of the top-10 IBB names reporting before Friday. The table below outlines consensus expectations:
| Ticker | EPS ($) | Revenue ($ B = Billion, M = Million) |
| GILD | 1.77 | 5.82B |
| ILMN | 0.51 | 427M |
| BIIB | 2.82 | 2.15B |
| CELG | 0.89 | 1.85B |
| ALXN | 1.07 | 510M |
| AMGN | 2.07 | 4,91B |
| VRTX | -0.71 |
131.9M |
| ENDP | 0.88 | 643.9M |
| REGN | 2.26 | 644.5M |
| MYL | 0.72 | 1.88B |
Higher Expectations Priced In
The IBB is currently trading at $253.68. This is within 10% of it's all-time highs from February 2014. This means, compared to Q1, biotech stocks are pricing in higher expectations relative to Q2 performance. Therefore, the top-10 names in the sector need to have relatively good performance and "clean" quarterly reports in order to preserve and increase investor confidence in the sector.
Yellen Comments Weighing
Last week in the Federal Reserve's semi-annual report to congress, Fed Chair Janet Yellen called out smaller firms, social media stocks and biotechnology stocks as having stretched valuations on a forward price to earnings ratio basis compared to historical norms. While biotech specialists may argue that the FED's analysis was flawed or inexact, the larger poiint here is that when the Fed speaks, the market listens. At Red Acre, we believe that weak Q2 numbers from more than 1 or 2 of the top-10 biotech names would serve to enhance investor fears that biotech is overvalued leading to a general sell-off in this scenario.
Gilead Focus on Sovaldi
For Gilead Sciences (NASDAQ:GILD), investors will be focusing on Sovaldi run rate. While the sell side consensus is for $2.5 Billion in worldwide Sovaldi revenues, the sell side numbers are largely wrong. The "whisper numbers" on the buy side are for $3 to $3.5 billion in Sovladi revenue. this includes about $3B from US sales and $500M from ex-us worldwide sales. Therefore, anything short of $3 billion in Sovaldi sales could potentially be viewed as negative.
Investors will also be focusing attention on GILD's planned uses of excess cash. While the company has been recently buying back it's stock under a $5B authorized share repurchase program, investors will look for signs of either an increase in the buyback program, OR indications from management that an acquisition is on the roadmap. Our view at Red Acre is that an acquisition may be viewed positively by investors since GILD's management team has shown it can successfully acquire worthwhile assets, develop them to revenue, and recoup their investment while being accretive to earnings growth for shareholders.
Emerging Growth Story at Vertex
While Q2 and indeed full year 2014 for VRTX will be a net loss, The story here is evolving into one of an emerging growth biotech company. Consensus estimates suggest that Vertex will become profitable in 2015. This will be driven by the expanded revenue opportunity from the combination of Kalydeco and VX-809 for patients who are homozygous for the Del508 mutation (approximately 50% of Cystic Fibrosis patients). Further clinical trials that will read out late in 2014 or in 2015 will provide potential evidence of efficacy of the to drug combination in heterozygous patients (those having only 1 bad copy of the 508 gene). These further trials, if successful, would provide additional upside for VRTX stock.
For the moment, while VRTX my be fairly priced for the parts of the pipeline that have already been de-risked, this stock is worth watching and perhaps accumulating on dips since the binary event risk has now been taken off the table.
