|Kiplinger.com, Summer, 2020. This article was written with Ken Berman, founder of Gorilla Trades. It was part of a series of articles developed under an agreement with Kiplinger negotiated by me to designate Mr. Berman as a contributor and to deliver original articles for them on a regular basis.|
You could say biotechnology companies’ shares were merely “interrupted” this year. Biotech stocks, as measured by the iShares Nasdaq Biotechnology ETF (IBB), started to rally furiously in the back half of 2019. The COVID-sparked market downturn knocked them down, but they’ve returned to outperformance and are now up 15% year-to-date.
The party likely isn’t over, either.
New markets in areas such as anti-aging therapies and gene editing could be worth billions of dollars over the coming decade. That means biotech stocks should continue to get a bid over the coming years. While you can get access to many of these firms via exchange-traded funds (ETFs) like IBB, individual equities will typically give you more “bang for the buck” if you’re willing to accept more risk.
Conversely, you don’t have to gamble on tiny biotech plays to put the industry’s growth in your portfolio, either.
Here are five booming individual biotech stocks to buy. All of these mid- and large-sized stocks boast 30% or more gains year-to-date, but all of them still have room to run as they continue to develop game-changing technologies. Better still: They generally boast strong financial fundamentals to boot.
- Market value: $63.9 billion
Regeneron Pharmaceuticals (REGN, $622.45) has developed treatments for serious diseases for more than three decades. It has established itself as one of the leading innovators in the fields of immuno-oncology and bispecific antibodies. Meanwhile, its genetic research center could significantly expand the company’s pipeline in the coming years.
Thanks to strategic partnerships with Sanofi (SNY) and Bayer (BAYRY), Regeneron has ample and expanding exposure to Europe and other international markets. Indeed, collaboration revenues more than doubled year-over-year during the first quarter of 2020.
Regeneron has received plenty of publicity this year because of its COVID-19 response. However, while Regeneron’s REGN-COV2 antibody cocktail is among the promising treatment candidates, given the scale of the global push, the uncertainty regarding the success of this program is high. Fortunately, its pipeline is far more than coronavirus treatments.
One of the biggest drivers behind the company’s revenue growth has been Dupixent, which is used to treat eczema and asthma. However, Regeneron’s “cash cow” is Eylea, applied to a range of eye diseases; it generated $4.6 billion in revenues last year, and it’s expected to remain a stable source of sales in the U.S. until at least the mid-2020s. Other drugs of note are Praluent, Libtayo and Kevzara.
“While Eylea and Dupixent remain important near-term commercial driver, we think that the oncology business (anchored by Libtayo) will likely drive the next leg of growth for the company in the coming years,” write Credit Suisse analysts, who have an Outperform rating (equivalent of Buy) and $700 price target.
Regeneron has significantly improved its margins in recent years, so even if the hype behind its REGN-COV2 cocktail fizzles out, long-term growth prospects remain appealing. Yes, REGN’s $2 billion-plus annualized R&D budget is one of the largest among biotech stocks. However, it’s still able to maintain a burly balance sheet featuring $4 billion in cash, and generate roughly $1.3 billion in annualized free cash flow.
- Market value: $7.2 billion
Exelixis (EXEL, $23.48) is focused on the discovery and development of genomic-based drugs to fight several types of cancer, including those affecting the kidneys, liver and skin.
Its top products, Cometriq and Cabometyx, are both based on Exelixis’s flagship compound, cabozantinib; the latter is the market-leading thyroid cancer medicine. Clinical trials suggest cabozantinib may be applicable to a much wider range of possible applications.
“We anticipate several data sets that could add to the total addressable market of the Cabometyx franchise this year,” write William Blair analysts, “namely the Phase III COSMIC-311 in differentiated thyroid cancer, Phase III COSMIC-312 study in hepatocellular carcinoma, and the Phase II CANTATA trial in relapsed RCC in combination with telaglenastat.” William Blair has an Outperform rating on the stock.
The company is pushing hard to further leverage cabozantinib through royalties, and together with its partners Ipsen and Bristol-Myers Squibb (BMY), establish combined treatments based on it for several types of cancer including advanced hepatocellular carcinoma and genitourinary cancers.
Exelixis is in outstanding financial position, boasting more than $954 million in cash versus no long-term debt. It has been free cash flow-positive for years, too, including $249 million in FCF over the past 12 months.
EXEL shares are expensive by most measures, as biotech stocks often are. However, in the case of a growth stock like Exelixis, this shouldn’t scare you off. Even by conservative estimates, the company has a large market opportunity to grow into. And it has confirmed its guidance for the rest of the year, expecting only a modest COVID-19 impact on operations and milestones.
(3/5) Vertex Pharmaceuticals
- Market value: $75.5 billion
Vertex Pharmaceuticals (VRTX, $291.10) isn’t just one of the biotech industry’s growth powerhouses. It also sports robust profits, an enviable balance sheet, and a diversified and potentially explosive pipeline.
The company’s flagship product is Trikafta, its new cystic fibrosis (CF) drug that recently launched in the U.S. This potential blockbuster’s revenues were $895 million during their first full quarter of sales, which accounted for 60% of the company’s total, helping to absorb declines of older CF medicines Kalydeco, Orkambi and Symdeko.
Trikafta, which is patent-protected until 2037, quickly became the U.S. market leader, and it’s expected to drive expansion in the coming quarter while supporting the company’s business development, research and possible acquisitions.
Vertex management is not afraid to make bold moves. In 2019, VRTX bought Semma Therapeutics for nearly $1 billion in a bid to enter the type 1 diabetes market, which could set the stage for another pillar of growth. Vertex also joined the gene editing revolution in 2019, buying out Exonics Therapeutics for $245 million. Vertex also established a partnership with Switzerland’s Crispr Therapeutics (CRSP) in 2019, eyeing the treatment of kidney diseases, beta-thalassemia, and sickle cell disease, among other diseases.
The company maintains a healthy balance sheet, with $4.2 billion in cash easily offsetting no long-term debt and about $530 million in long-term leases. More recently, Vertex – which is one of Credit Suisse’s “top picks” – updated its FY2020 revenue guidance upward despite the pandemic, thanks in large part to better-than-expected results of Trikafta.
- Market value: $21.8 billion
Denmark-based Genmab (GMAB, $33.44) is one of the world’s leading companies in cancer therapeutics based on antibodies. Its strategy to outsource manufacturing to its partners, seeking flexible and robust agreements, has enabled growth while keeping costs relatively low.
The result? Ample margins. In fact, Genmab has the highest operating margin — by double digits — of companies in this group. GMAB has netted profits for seven consecutive years and amassed a nearly $2 billion cash pile. That’s vital to reaching its strategic goal of building a differentiated portfolio.
Revenues from Genmab’s blockbuster multiple myeloma drug Darzalex shot 49% higher year-over-year to $937 million, consisting both of direct sales and royalties. The monoclonal antibody-based medicine continues to gain market share in Europe and the U.S. with the help of agreements with Seattle Genetics (SGEN) and BioNTech (BNTX). The company’s other marketed product, Arzerra, is another monoclonal antibody used to treat chronic lymphatic leukemia.
Earlier this year, the company received U.S. Food and Drug Administration (FDA) approval for its thyroid eye disease treatment Tepezza. Meanwhile, Genmab’s pipeline grew from two to seven clinical programs between 2017 and the end of 2019, and it now has 20 preclinical programs.
The company’s most promising products under development include ofatumumab for treating multiple sclerosis, tisotumab vedotin for treating cervical and ovarian cancers and solid tumors, and other compounds targeting thyroid eye disease, Parkinson’s disease and a wide range of tumors.
RBC Capital analyst Kennen MacKay has an Outperform rating on shares, citing “vast potential” for epcoritamab – a Phase 1 candidate it has developed in partnership with AbbVie (ABBV) to treat multiple hematological malignancies.
(5/5) Emergent BioSolutions
- Market value: $4.4 billion
Emerging BioSolutions (EBS, $84.08) is a quickly growing biopharmaceutical company focusing on novel vaccines, treatments, medical devices and other medical countermeasures to tackle public health threats. Among others, EBS is marketing smallpox, cholera, anthrax and typhoid vaccines, as well as Narcan, which is used to treat opioid overdoses.
The company has a $2 billion contract with the U.S. government to supply its ACAM2000 smallpox vaccine until 2029, which should provide a steady stream of income. Its Narcan spray and anthrax vaccine are gaining market share as well.
EBS also is among the laundry list of companies involved in the COVID-19 response. It has agreements to provide development and manufacturing services for Johnson & Johnson (JNJ), Vaxart (VXRT) and Novavax (NVAX), and it also has launched the development of two plasma-derived COVID-19 therapies.
The company’s pipeline, apart from the COVID-related contracts, looks promising, too. Emergent’s chikunguya vaccine candidate has received special development designations from the FDA and European Medicines Agency (EMA). In addition, Emergent’s Vaxchora oral cholera vaccine is the only such product approved in the U.S.
Emergent is swiftly building a diversified portfolio, and material gains on the top and bottom lines have translated into a 56% rally for the year-to-date.
Of this group of biotech stocks to buy, EBS does have the shakiest balance sheet – about $180 million in cash versus a still-plenty manageable $774 million in long-term debt. Also, it could have a shaky short-term thanks to potential Narcan generic competition from Teva Pharmaceutical (TEVA).
Nonetheless, four of the five analysts that have sounded off on shares over the past two months have rated the stock a Buy. In EBS’ case, consider waiting for a short-term pullback on broader market weakness before jumping in.