UBS analyst Carter Gould started coverage of several biotech names with a Buy rating, saying he finds bullish signals amid the noise and expects the sector to return to outperformance, overcoming continued political and pricing risks. Nonetheless, he recommends taking a “selective approach” to the space as continued growth headwinds should remain pertinent for some companies.

BULLISH BIOTECH OUTLOOK FOR 2017: In a research note to investors, UBS’ Gould noted that after a six-year run, the biotech bull market took a pause in 2016. While primarily attributed to elevated drug pricing, events like the stalled out volume growth across key franchises, lackluster 2015/2016 launches, and pricing headline risks were also notable, the analyst contended. However, Gould is launching coverage of the space with a positive outlook given a better line-up of drug launches for 2017, including Biogen’s (BIIB) Spinraza for spinal muscular atrophy, Regeneron’s (REGN) Dupixent for atopic dermatitis, and Incyte’s (INCY) Olumiant for rheumatoid arthritis. Additionally, the analyst highlighted the calendar of high-profile catalysts around key pivotal datasets and numerous early stage datasets for drugs not yet in most Wall Street models. Coupled with still favorable secular fundamentals like supportive regulatory framework and aging demographics, Gould expects the biotech sector to return to outperformance, overcoming continued political and pricing risks. The analyst initiated coverage of Celgene (CELG), Regeneron, Vertex (VRTX) and Acceleron (XLRN) with Buy ratings.

SELECTIVE APPROACH: Despite his bullish sector outlook for 2017, UBS’ Gould recommended a “selective approach” as some companies continue to address struggling top-line growth from declining or maturing key franchise. Gilead’s (GILD) Hepatitis C franchise has yet to bottom, while Biogen’s Multiple Sclerosis franchise faces plateauing sales already and emerging competition, the analyst argued. Moreover, Gould told investors that he is skeptical of M&A targeting the larger-cap names, particularly in Alzheimer’s or I/O, and is doubtful of generalists rushing back to the space given the growth outlook and headline risks. Additionally, he noted that tax reform and pricing risk do not impact names uniformly. Gould started coverage of Incyte, Gilead and Amgen (AMGN) with Neutral ratings, and initiated Biogen with a Sell rating.