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Biotech stocks have turned the tide in recent weeks, but the surging sector is still missing one key ingredient for growth this year, Evercore ISI analyst Mark Schoenebaum said Thursday.
That missing link is a major product cycle of new drug discoveries for "big" diseases, according Schoenebaum, a member of Institutional Investor's 2015 top team for major pharmaceuticals and biotechnology.
In particular, the industry has not found success with drugs Wall Street expected to fail, which historically provide the biggest upside surprise for stocks, he added.
"We haven't seen a lot of that this year, and that's what the space really, really needs. And it's not clear we're going to get that this year," he told CNBC's "Fast Money: Halftime Report."
Still, Schoenebaum said valuations within the space are reasonable and could prove interesting to value investors. He said he'd be surprised — but not shocked — if the sector turns lower once again.
The iShares Nasdaq Biotechnology ETF is up 16 percent since the rally began the week of June 27, while the SPDR S&P Biotech ETF is up 19 percent over the same period. They are down 17 percent and 15.7 percent this year, respectively.
The stock most likely to hold or extend recent gains is Biogen — up 7 percent in the last four weeks — Schoenebaum said. The shares are down 8 percent this year, though he has had a buy rating on them throughout that time.
Schoenebaum said he doubled down on Biogen stock on the view that the company has a high probability of developing a dominant Alzheimer's franchise by 2018 or 2019.
In his view, there is currently an unmet need for Alzheimer's drugs, which have an addressable market of millions of patients. But the next set of definitive data from Biogen is not due until 2018, which is beyond the investable time horizon for many Wall Street firms, he said.
In the next year, Schoenebaum said he expects investors to realize that Biogen has "the best data ever presented in Alzheimer's — period," and that its phase three trials "are not terribly high risk."
Gilead, up 11 percent during the rally, is another stock for which investors must take a long-term view. The shares are down 26 percent over the past year.
The company faces slowing growth in its key hepatitis C and HIV drug business, and now needs a third leg to stand on, he said.
Schoenebaum noted the biotech giant has historically allocated half of what peers spend on research and development, opting instead to expand through acquisitions. But investors fear no single deal can spark a turnaround because the company, in terms of net income, is so large.
"This could be a multiyear process of smaller deals that sort of accumulate over time and eventually accelerate the growth rate," he said.
Still, Gilead has "arguably the best CEO in the business" in John Milligan, and the stock is trading at a single-digit price-earnings multiple, he said.