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The IBB, an ETF that tracks the sector's biggest players, is up more than 11 percent this month and tracking for its best month in more than 2 years. This week is the busiest week of earnings, and some key biotech players including Amgen, Biogen, and Celgene are set to report quarterly results.
Investing in biotech can be tricky since companies are so dependent on the development and success of their drugs in clinical trials. The broader health-care industry has also been caught in Washington's crosshairs after some high-profile cases of drastic drug price increases. And while the IBB has surged so far this year, the ETF slid nearly 10 percent in 2018. In the fourth quarter of 2018 the index fell more than 20%.
Baird senior research analyst Brian Skorney says there's value to be found in the space, but investors should look for company-specific stories rather than buying the index as a whole. Specifically, investors should focus on companies that have upcoming catalysts.
"Definitely people have more of a stock-specific outlook for 2019. I think there's probably more skepticism on owning IBB than not. I wouldn't necessarily characterize people as particularly bearish, but maybe a little more bearish than bullish on the sector as a whole," he said when reached via phone.
Amgen reports fourth-quarter earnings on Tuesday after the close, and analysts are expecting EPS of $3.27 on $5.84 billion in revenue, according to estimates from FactSet. Skorney is cautious on the stock ahead of that report given the uncertainty around what's happening with the company's key drug Neulasta. Competitor Mylan created a biosimilar drug to Neulasta, which Skorney says could pressure Amgen's sales.
"Since the approval of Mylan's biosimilar Fulphila in June 2018, we have been increasingly concerned about the future of Neulasta … We think that the entry of this competitor has multiple read-throughs for the quarter and upcoming year. For 4Q, we expect to see Neulasta sales decline primarily due to pricing pressures," he wrote in a note to clients Friday.
Skorney will also be looking for commentary from the company's management surrounding its product pipeline. He has a neutral rating on the stock, and a $179 target, which is 10 percent below the stock's Friday closing value. The average Street target on the stock is $207, according to FactSet estimates.
Biogen also reports earnings on Tuesday, and analysts are forecasting EPS of $6.73 and $3.39 billion in revenue. Skorney has a neutral rating on the stock and is staying on the sidelines until there's more clarity surrounding the company's much-anticipated drug for Alzheimer's disease.
"It's a funny stock in that it has the biggest catalyst of anything in the biotech sector in 2019, but it's a catalyst that might not even occur," Skorney said referring to the company's drug under development, adding that "people are focused on that phase 3 program. It's a major swing factor for the stock."
Skorney downgraded Biogen to neutral from outperform last April, and he has a $348 target on the stock.
Of the biotech giants reporting this week Skorney's top pick is Celgene given the potential upside from the deal with Bristol-Myers. "I just think there's this massive discount between where Celgene is trading and where, if the deal goes through, Celgene would wind up closing," he said.
Earlier this month Bristol-Myers announced plans to buy Celgene in a cash and stock deal valued at $74 billion. Under the agreement, Celgene shareholders would receive one Bristol-Myers Squibb share and $50 in cash for each share held.
"I have the utmost confidence that this deal will wind up going through and anyone who buys the stock today would make a pretty substantial return on the price," Skorney added.
Celgene reports fourth-quarter results on Thursday before-the-bell, and analysts are expecting EPS of $2.32 on $3.99 billion in revenue.
- CNBC's Berkeley Lovelace Jr. contributed reporting.