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Perfect storm of patent expiries and M&A will see biotech stocks outperform, says broker

The biotechnology and healthcare sector has entered a “sustained period of momentum underpinned by a perfect storm" of events, according to City broker Cenkos.

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The biotechnology and healthcare sector has entered a “sustained period of momentum underpinned by a perfect storm" of events, according to City broker Cenkos. 

In a note to clients it pointed out that large-cap pharma and diagnostic companies are hitting what’s called the patent cliff. 

This describes the painful and expensive process that sees patent protected cash-cow products opened to cheap, copycat competition.

Meanwhile, the replacements are “sub-scale and generally lacking innovation”, it adds, while pricing pressure is rife, the note added.

The regulatory authorities, and specifically the all-powerful US Food & Drug administration, seem much more inclined to give approval to new pills and potions that have come through the clinical trials process, the Cenkos note said.

At the same time the need to replenish empty product pipeline has seen takeover activity in the sector spike, it pointed out.

All of these factors are positive for the up-and-coming stocks in the sector, creating the aforementioned perfect storm, according to the broker’s head of research, Navid Malik.

“We expect the coming decade will generate super-normal returns in the sector, and would be long of it,” he said.

Conventional logic suggests companies with assets in the late stage of development, therefore de-risked, make the best investments.

However, Malik pointed out: “Last year proved beyond doubt, that what really drives superior returns is not the stage at which a clinical programme is, but the tendency to surprise the market with data which can rapidly de-risk a programme irrespective of its market or stage of development.”

A case in point was Scancell Holdings (LON:SCLP), which soared 690% in 2012 on the back of some fairly interesting but still early stage phase I/II data from a potential vaccine for skin cancer.

This made it the UK’s best performing biotech, and it even outperformed American stars such as Sarepta (NASDAQ: SRPT), which rose 500% in 2012.

Cenkos’ other picks include ImmuPharma (LON:IMM), which has a late-stage and potentially breakthrough treatment for the auto-immune disease Lupus.

ReNeuron (LON:RENE), which is using stem cells to treat stroke victims, Scancell and Imperial Innovations (LON:IVO), the medical technologies group, are among Cenkos’s favourites.

ANGLE (LON:AGL), whose cell capture technology could revolutionise cancer screening, and Proteome Sciences (LON:PRM), which is developing diagnostic devices for diseases  such as Alzheimer’s, are also on the list.

“In our view, we would strongly skew any investment portfolio towards companies with therapeutic products in areas of unmet or poorly served medical need and as importantly, have a bias towards biological and regenerative medicine,” the analyst added. “The same concept applies for innovative diagnostics.

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