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Baird analysts stay Neutral on biotech sector as 2019 gets underway

Vertex Pharmaceuticals, Intercept Pharmaceuticals and Aimmune Therapeutics are three biotech stocks Baird's Brian Skorney describes as diamonds in the rough

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It remains unclear whether the Bristol-Myers Squibb and Celgene merger will 'change the tune' in the sector

Baird analysts forecast that there will be as many headwinds for the biotech sector as tailwinds in 2019 and say they are sticking to a Neutral outlook on the sector, according to a new research note.

While the speed of the sell-off in biotech shares at the end of 2018 means they could see “a bit of a bounce” and Bristol-Myers Squibb’s (NYSE:BMY) move to buy Celgene (NASDAQ:CELG) for $74 billion has generated a flurry of attention, Baird’s Brian Skorney and Michael Ulz “just don’t see much reason” for the sector to re-rate.

READ: Biotech CEOs see Bristol-Myers' $74B acquisition of Celgene as a win

“The end of 2018 did not go well, and biotech investors remain a bit shell-shocked,” Skorney and Ulz wrote in a note to investors. “With more FDA approvals, but lower peak sales for drugs on the horizon, it’s hard for us to get more excited than we were at the beginning of last year.”

On the mergers and acquisitions front, it remains unclear whether the marriage of Bristol-Myers Squibb and Celgene will “change the tune” in the sector. And Skorney and Ulz predict that consolidation is more likely to come in the large-cap space and are not betting on a surge in smaller deals.

Sector offers diamonds in the rough for stock pickers

But when it comes to picking biotech stocks, Skorney and Ulz argue that there are some diamonds in the rough.

Vertex Pharmaceuticals Inc (NASDAQ:VRTX) remains Skorney’s top large-cap pick as he thinks growth investors will look to increase stakes in one of the few S&P 500 names that is “really growing.”

Intercept Pharmaceuticals Inc (NASDAQ:ICPT) is also on Skorney’s list of bets as its REGENERATE Phase 3 data could become a catalyst to support the first-approved drug to treat nonalcoholic steatohepatitis (NASH), a type of non-alcoholic fatty liver disease.

Aimmune Therapeutics Inc (NASDAQ:AIMT) is Skorney’s final pick. Its lead investigational drug, AR101 for peanut allergies, is in the final stages of clinical testing to support regulatory approval. “AR101 approval should catalyze enthusiasm for a second half of 2019 launch of the first treatment for peanut allergy,” concludes Skorney.

Ulz’s top stock pick in the sector, meanwhile, is BioMarin Pharmaceutical Inc (NASDAQ:BMRN) thanks to its strong, diversified base business and the promise of its drug valrox, which treats hemophilia A as well as vosoritide, which takes aim at achondroplasia, the most common form of dwarfism.

--Contact Ellen Kelleher at [email protected]

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