How To Invest During Biotech's Latest Crisis

• Shares of the biotechnology ETF, iShares NASDAQ Biotechnology Index (ETF) (NASDAQ: IBB), have lost more than 15 percent over the past three months.
• The sector has been hard hit following a "drug pricing crisis," according to Irina Koffler of Mizuho Securities who initiated coverage of the sector.
• Koffler named Allergan PLC (NYSE: AGN) and Horizon Pharma PLC (NASDAQ: HZNP) as her top two picks in the sector.

Irina Koffler noted that the industry will offer an "appropriate response" to the "growing drug pricing crisis." However, sector valuations will remain "under pressure" for at least another year.

Koffler noted that both Democrats and Republicans are likely to introduce their own plans to improve access to affordable drugs. The analyst added that the "uncertainty" and "negative coverage" could temporarily overhang specialty pharmaceuticals. Accordingly, "the best defense is an offense."

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"Instead of acknowledging the scope of the problem and its negative impact to patient lives, the industry has instead taken a defensive stance," Koffler wrote. "We find their arguments too complex for key stakeholders and don't think they can effectively diffuse the situation: Innovations do not justify the industry's tone-deafness in today's social media-driven society. If the industry wants to avoid government-negotiated drug pricing, it will need to proactively introduce its own proposals to increase access to affordable medications in our view. We believe that the pharma lobby can shift the discussion to identifying positive solutions (and once it offers this olive branch, the pressure on sector valuations should ease)."

Koffler said that in the current environment, it is appropriate to assume lower annual price increases and higher gross-to-net discounts on all of the drugs in her valuation model.

The analyst went on to name Allergan (Buy rated, $337 price target) as a top pick given the company's "well-run" business, medical aesthetics franchise and optionality associated with its pending generics unit sale.

Koffler named Horizon Pharma (Buy rated, $32 price target) as her other top pick given its "attractive" Orphan portfolio and a durable primary care business that has been shielded from pricing pressure by its "innovative" commercial model.

The analyst also "likes" Endo International plc – Ordinary Shares (NASDAQ: ENDP) (Buy rated, $82 price target) given the "defensive nature" of its generics business which is "relatively shielded" from criticism while retaining some pricing leverage.

Finally, the analyst is positive on Jazz Pharmaceuticals plc – Ordinary Shares (NASDAQ: JAZZ) (Buy rated, $164 price target) given the anticipated "durability" of its cancer products and additional business development as well as its product pipeline expansion.