^{MIZUHO SECURITIES USA INC.  |  US EQUITY RESEARCH}

Summary

Our top biotech pick for 2016 is TSRO. We like VARUBI's chances of success and think two data readouts in 1H16 for the PARP inhibitor niraparib could be even larger catalysts for the stock. Also, TSRO's checkpoint inhibitors should begin to command attention as they enter the clinic. For the industry, we expect drug pricing commentary to continue to be a headwind, large pharma to continue to use small cap bio to plug pipeline holes, and see no let-up in the focus on immuno-oncology.

Key Points

Our top pick for 2016 is TSRO. We are positive on the launch of VARUBI given management's track record in the CINV setting, and we think two data readouts for niraparib in 2Q16 could be even more significant catalysts. TSRO's early-stage checkpoint inhibitors are entering the clinic as well, which could command additional focus from investors.

Only 11 months till the election. We expect drug pricing to continue to be in the cross-hairs of stump speeches and candidate tweets, though it could always be supplanted by numerous other topics- whatever makes poll numbers go up. Should the pricing issue remain a headline, we could see more stories of alternative pricing models being developed, such as "pay-for- performance".

We expect big pharma to continue to look to smaller biotech companies to bolster growth and plug holes in pipelines. Development collaborations are likely to continue at a robust pace, and we think asset swaps could become more prevalent across the industry as business lines are realigned to focus on organizational strengths. These asset swaps could create more efficient and targeted businesses for large pharma that in turn could better utilize small cap biotech R&D programs.

We expect immuno-oncology to continue to attract enormous attention in both the scientific and investment worlds. The first FDA filings for CARs should occur in 2016, and checkpoint inhibitors should continue on the developmental fast track. TCR programs could begin to emerge from the shadow of their CAR brethren. We expect combination strategies involving all of the above, and more, will continue to evolve.

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