Wall Street Looks to Soothe Biotech's Holiday Meltdown (GILD) (CELG) (AMGN)

Biopharma stocks were crushed Tuesday, a day after AbbVie's (NASDAQ: ABBV) move to sign an exclusive with Express Scripts (NASDAQ: ESRX) for Viekira in HCV, despite Gilead Sciences' (NASDAQ: GILD) Harvoni being a better treatment option. The move has ignited fear in the industry that biosimilar manufacturers will cut similar deals with PBMs to be on preferred formulary or may be exclusive formulary. By some estimates, this could have biosimilars cutting price by 30% which could force branded manufacturers to cut their prices by 15% to compete.

Amid the carnage, a number of Wall Street firms are coming out in defense of the sector.

Piper Jaffray's Joshua Schimmer said discounts for favorable formulary adoption is not some surprising new disruptive tool never before recognized, although the market is acting like it is. He said it is premature to speculate what the ESRX/ABBV announcement could have on GILD's HCV franchise, and it's even more premature to believe we're on the cusp of some new industry-wide dynamic.

"Because this pricing/rebate dynamic existed well before yesterday, it's hard to see how this precedent will actually have any broader impact," he commented. "That said, we believe a retraction has been due as a result of recent frothiness in many biotech names and rising multiples across the board."

Schimmer said it would be wise to wait and see if this is the beginning of the end of GILD. He said while the news reduces the probability of a massive beat in 2015, the consensus of $15B W/W still seems achievable, and if not GILD can still spend less or repurchase shares to get to $10/share in earnings. He views GILD's valuation as increasingly attractive.

Commenting on why he doesn't think this should be the start of new price war, he believes the short-term use of HCV therapies plus the heterogeneous market segmentation makes the dynamics unique to HCV, so a read-through to other settings is somewhat sloppy. He also notes acute and chronic is a key difference "For payors, it's easy to switch its population without losing the benefit of rebates if use of a drug is short-term, like with HCV (or Neupogen or Neulasta)," he comments. "It's a much different dynamic with chronic use drugs because switching patients is time-consuming and costly. Yet another reason to not read-through much beyond HCV."

Despite his view that the sell-off is misguided, Schimmer said he wouldn't fight the tape and sees the retraction as healthy for opening new opportunities. He notes sometimes more attractive valuations get dragged down with the frothy ones. He said this feels like a much bigger version of QCOR to us - a story which ended very, very well.

Piper Jaffray's related stocks: Amgen (NASDAQ: AMGN), Biogen Idec (NASDAQ: BIIB), BioMarin Pharma (NASDAQ: BMRN), Celgene (NASDAQ: CELG), Gilead Sciences (NASDAQ: GILD), Incyte (NASDAQ: INCY), Pharmacyclics (NASDAQ: PCYC).

Likewise, Baird biotech analyst Christopher Raymond issued a note Wednesday entitled "Everybody Just Chill.' He said, "[r]emain constructive on biotech, and while we can’t ignore the sentiment overhang, we are hard-pressed to see how ESRX’s most recent salvo against GILD’s HCV franchise constitutes a wholesale, across-the-board challenge to the pricing power enjoyed by meaningfully differentiated, life-saving therapies. Indeed, with NBI correcting 6% the last two days, we see a significant overreaction in shares of ALXN, BIIB, CELG, GILD and REGN. Would be buyers of all five large-caps and mid-caps BMRN and VRTX on weakness."

Baird's related stocks: Alexion Pharma (NASDAQ: ALXN), Biogen Idec (NASDAQ: BIIB), BioMarin Pharma (NASDAQ: BMRN), Celgene (NASDAQ: CELG), Gilead Sciences (NASDAQ: GILD), Regeneron (NASDAQ: REGN), Vertex Pharma (NASDAQ: VRTX).

Related ETFs: iShares Nasdaq Biotechnology (NYSE: IBB), SPDR S&P Biotech ETF (NYSE: XBI)

You May Also Be Interested In

• Growth isn't weak enough to truly undercut inflation pressures - BMO
• Synovus Financial (SNV) PT Lowered to $42 at Piper Sandler
• Netflix (NFLX) raised to Buy at Needham & Company on revenue upside