Biotech stocks are ready to roar, this fund manager says

Biotech was a hot performer over the past decade as drug therapies arose for a range of cancers along with chronic diseases like hepatitis C and multiple sclerosis. The iShares Nasdaq Biotechnology ETF (NASDAQ:IBB) delivered gains of 330 per cent between 2010 and the close of 2019, far out-performing overall market returns for the period.

At the same time, those gains were more prominent over the first five years of the 2010s than the last, as exemplified by IBB which has delivered negatively since mid-2015.

That speaks to the untapped value in biotech, says Rahim, who covers the sector for Next Edge and spoke to BNN Bloomberg on the topic on Tuesday, saying that the relative value of biotech stocks is clear.

“Biotech is traditionally a non-economically-sensitive sector,” said Rahim. “Multiples have come down a lot and part of that is due to the [rate hiking] cycle, as biotech tends to be very rate-sensitive. On a relative value basis, we are looking at biotech multiples in the 13x-15x area versus 21x, 22x for the S&P, so the sector remains a source of great value.”

“We’ve begun to see the market migrate [to biotech] and we think that bodes well for 2020 as money flows towards it,” he said.

One name that Rahim especially likes is Theratechnologies, specifically due to the company’s drug Egrifta, which is used for HIV-related liodystrophy but could do very well in the realm of treating fatty liver disease.

Because of the success of Egrifta, the first drug that they launched, they realized the drug’s benefits in dissolving liver fat. So, they have filed to do a trial to expand the label of this already-approved, successful drug,” Rahim said. “We think that the indication is big and important.”

Theratechnologies hit a high of $14.75 in mid-2018 but has since been on a prolonged slide, reaching below $4 per share over the past month. Disappointing quarterly numbers have been a factor, but management is forecasting stronger growth for 2020, calling for revenue between US$83 and US$87 million, which would represent a 31 to 37 per cent increase.

Last month, Theratechnologies CEO and president Luc Tanguay called 2019 a year of growth and transition as the company worked to rebuild its research pipeline.

“In 2020, we will implement numerous new marketing initiatives for Trogarzo in the US, and plan to start the commercialization of this product in Europe,” wrote Tanguay in a press release. “We are also confident that the recent launch of EGRIFTA SVTM will spark renewed interest and momentum for this product for the coming years. On the R&D front, we plan to start, by the end of 2020, a Phase III trial for the treatment of NASH in HIV patients and a Phase I trial for our novel oncology platform.”

Rahim called Theratechnologies a Canadian success story.

“It’ll grow its top line 20 per cent over the next three to five years,” he added. “You can’t usually find a biotech company that has proven success with that kind of revenue stream turn profitable for a $300-million market cap.”