Biotech Stocks Are Due to Bounce Back. This One Stands Out.

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Large-cap biotech will offer a smoother ride than small, and Vertex, in particular, looks attractive.

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Biotech stocks began the year in much the same way they ended it—by getting hammered. Vertex Pharmaceuticals, however, held its own, and that may be reason enough to start nibbling at its shares.

The sector had a terrible 2021. The iShares Biotechnology exchange-traded fund (ticker: IBB), which weights its holdings by market capitalization, rose 1%, its worst year since 2018, while the equal-weighted SPDR S&P Biotech ETF (XBI) fell 25%, its worst year since at least 2007. This year was supposed to be better, but so far it’s been anything but, with the iShares ETF down 7.9% through Friday’s close and the SPDR ETF off 8%—their worst starts to a year since 2016. Blame it on the hawkish minutes from the Fed’s December meeting.

Still, there are reasons to believe that things could get better. For starters, biotech stocks almost never have two bad years in a row. The last time the SPDR ETF suffered a drop of 15% or more was in 2018, and the fund followed it up with a 33% increase in 2019. It dropped more than 15% in 2016 and followed that up with a 44% rise in 2017.

The selloff has left more than 70 companies with more cash than their combined equity and debt, observes Baird analyst Brian Skorney, the most he has ever seen. “With the excitement of someone catching a falling knife, our view is turning optimistic on biotech outperformance going forward,” he writes. “Acknowledging structural risks remain, we think the sector is now well into oversold territory and believe we will see strong relative performance in 2022.”

Large-cap biotech will offer a smoother ride than small, and Vertex (VRTX), in particular, looks attractive. Like many biotechs, it had a miserable 2021, dropping 7.1% and underperforming the large-cap iShares Biotech ETF by about eight percentage points. Vertex, whose main drug is a treatment for cystic fibrosis, was hit by the failure of two different trials for a treatment for alpha-1 antitrypsin deficiency, a lung and liver disease—one in March and one in June.

Now the company is looking interesting. While the biotech sector has spent the first week of 2022 getting whacked, Vertex has gained 1%. One thing in its favor: AbbVie’s (ABBV) cystic fibrosis treatment might not be as big a threat as some think it is, says Jefferies analyst Michael Yee, who named Vertex a Franchise Pick last month. “AbbVie is not that big a deal,” he writes. “We argue ABBV is far behind and frankly the bar is high to actually show some data that matters.”

As for the pipeline, it may still hold some surprises, despite last year’s disappointments. In December, Vertex reported positive results from a Phase 2 trial of a treatment for a rare kidney disease, and it has ongoing trials for treatments for Type 1 diabetes and post-bunionectomy pain that could yield some positive surprises, argues RBC analyst Brian Abrahams.

“We see…little value ascribed to the company’s pipeline, which should provide upside optionality and catalysts for appreciation on any positive updates,” he writes. Abrahams has a $265 price target on Vertex, up 19% from Friday’s $221.85 close.

Investors may learn more on Monday, when Vertex is scheduled to present at the J.P. Morgan Health Care Conference. It doesn’t usually offer many fireworks, but it could provide an early look at some data from the diabetes- or pain-treatment trials.

Either way, expect the next move in Vertex’s stock to be higher.

Write to Ben Levisohn at Ben.Levisohn@barrons.com