The biotech sector is known for raising pulses. Even the best biotech stocks can be very volatile assets, and most companies aren’t even profitable! Share prices are more influenced by sentiment than substance, so you can’t evaluate a biotech stock simply by glancing at financials. To truly understand where a company is headed, you need to know what’s driving the stock.
Most biotechs are small companies that focus exclusively on developing a handful of drugs. The fate of these companies is linked inexorably to the drugs they are studying. Millions of dollars go into researching and developing biotech treatments, and that money goes down the drain if the drugs don’t pass clinical trials. Unexpected bad results from trials can render a biotech company practically worthless overnight.
It’s a high stakes business but there are many opportunities for those who are willing to take chances. Biotech stocks can make huge upward moves when a clinical trial produces favorable results, and share prices can double or even triple in a relatively short amount of time. The margin between success and failure is razor thin in this industry. It’s a tough place for even the most informed investor to turn a buck, but you can make successful investments if you take the time to study companies you’re investing in.
Even the best biotech stocks can be an intimidating place to invest. With all the medical terminology and technical jargon, it can be a chore just reading about these companies. However, if you take the time to study the biotech stocks on your watchlist, you can spot the winners. Picking the right biotech stock can net you insane gains, but there are a dozen losers for every winner.
Biotech, Not Pharma
Don’t confuse the biotech sector with the pharmaceutical space. Biotech companies create drugs that are derived from living organisms. It’s the cutting edge of the drug development space. Biotech companies are producing ground-breaking medications for previously untreatable diseases, like Hepatitis C, cancer, and rare genetic disorders. Creating these drugs is capital-intensive and success is extremely uncertain. When comparing biotech companies for investment, make sure you are using similar businesses to make your comparison. Ratio averages differ significantly between the biotech and pharma sectors, so it’s like comparing apples to oranges. Be aware of the difference so you can accurately analyze the technicals behind each stock.
How to Play the Best Biotech Stocks
Study, study, and study some more. Don’t buy a company unless you know what they’re doing and how it’s coming along. This is an extremely complicated sector but you too can score big gains in biotech stocks if you take an educated approach. Biotech investors are a savvy bunch and your head needs to be in the game if you plan to keep up. Most of the best biotech stocks are high-growth, high-risk investments that should be approached cautiously.
Best Large-Cap Biotech Stocks
One of the largest and most stable biotech companies, Pfizer is largely known as a big pharma player, but it has invested billions of dollars into its biotech business. This company is a corporate juggernaut, ranked 57th in Fortune’s 2018 ranking of largest U.S. corporations by total revenue. Pfizer’s scale makes it a pretty stable investment. It’s one of the few companies on the list that pays investors a dividend, and theirs yields 3.55%. Pfizer is a solid blue chip company, but most biotech investors are willing to risk more for a chance at big gains.
Pfizer has a ton of actively distributed products, and they also have a thriving clinical segment. Currently, Pfizer has 37 clinical-phase products developed from biological compounds. With so many clinical-phase drugs, the risk of failure is spread more evenly. Unlike smaller companies, Pfizer isn’t pinning its hopes on one or two products.
Another massive corporation, Amgen boasts a market capitalization of over $110 billion. Amgen is a textbook biotech stock success story. If you had bought Amgen before the close on its IPO day, you would have paid 34 cents per share. Today, your shares would be worth over 500 times what you paid for them. Now, Amgen is a mature biotech company, but its stock doesn’t have the explosive growth potential it had while it was in its infancy. Amgen has been a steady long-term performer and they pay a decent dividend that yields 3.23%.
Amgen produces several popular drugs that treat a variety of diseases and genetic disorders. Most of their drugs are already being actively distributed to customers, so there is more certainty in this company than with smaller biotech developers. Currently, Amgen has six products undergoing the third phase of clinical trials, including Enbrel and Imlygic
Bristol Myers Squibb (BMY)
Bristol Myers Squibb is a large-cap biopharmaceutical firm that develops, manufactures, and sells therapy products across the globe. The company has been in the news lately after its acquisition of Celgene (CELG). Shareholders had a bad reaction to the deal at first, and movement formed amongst shareholders to vote down the transaction. The rebellion was eventually quelled and shareholders approved the transaction on April 12th, 2019.
It’s still unclear how the Celgene Acquisition will affect Bristol’s bottom line, so there is some uncertainty in this stock moving forward. However, that uncertainty has made the stock an excellent value in terms of price per earnings (PE) and price per earnings growth (PEG). At first, several prominent investors came out against the deal, but sentiment has been gradually shifting the other way. If you think Bristol’s acquisition of Celgene will be a success, the shakeup in share prices is a great buying opportunity for intermediate and long-term investors looking for value.
Best Small-Cap Biotech Stocks
Akebia Therapeutics (AKBA)
Akebia develops and monetizes pharmaceutical therapies. The company focuses most of its efforts on developing treatments for kidney diseases. Its lead product – Auryxia – helps patients suffering from chronic kidney disease manage their phosphorus levels. Akebia is also developing a treatment for anemia associated with kidney diseases. The product is called Vadadustat and it’s currently in its third phase of clinical testing.
This company is operating at a loss, but they have collaborative agreements with other biotech companies across the globe. Uncertainty is a big part of an AKBA investment, but there are opportunities for huge rewards as well. The fate of Akebia’s flagship therapies will ultimately determine share prices.
Aerie Pharmaceuticals (AERI)
This company specializes in ophthalmic therapies for the treatment of glaucoma and other retinal diseases. Aerie is based in Durham, North Carolina and has a market capitalization of about $1.73 billion. The company’s flagship treatment is Rhopressa, daily eye drops that relieve elevated levels of intraocular pressure (IOP) associated with glaucoma. The company’s other mainstay product, Roclatan, has also been approved by the FDA. Roclatan is also a once-daily eyedrop, but it treats IOP associated with a different form of glaucoma.
The company has successfully obtained FDA approval for their first two drugs, and that reflects well on the Aerie research team. The company has obtained FDA approval to begin preclinical research on one of their newest drugs, AR-13503, and they have two other products in development as well. CEO Vincente Anido projects that the company will be making money by mid-2020, but nothing is certain in the biotech space.
Audentes Therapeutics (BOLD)
Audentes develops gene therapies for patients suffering from dangerous diseases caused by single-gene defects. Researchers at Audentes are developing treatments for X-Linked Myotubular Myopathy (XLMTM), Crigler-Najjar syndrome, Duchenne muscular dystrophy, and more.
One of their most promising drugs is Aspiro – or AT132. It’s being studied for the treatment of XLMTM and it showed promising results on its Phase 1/2 clinical trials. Using 48 weeks of follow up data, the clinical study concluded that treatment with Aspiro significantly improved the symptoms of several patients who took the drug.
Tandem Diabetics (TNDM)
Though it isn’t a traditional biotech company, Tandem is a leading developer of high-tech medical devices for insulin-dependent diabetes sufferers. Tandem is most known for its flagship product, the T: Slim X2 insulin pump. The pumps Tandem produces are packed with high-tech features. They can automatically adjust dosage with onboard AI, store therapy data securely on cloud servers, and much more.
Tandem opened its doors in 2006, but it’s still not profitable. Although they managed to squeak out a small $0.02 EPS during Q4 2018, the company has been under pressure to rein in its costs. Tandem is participating in an NIH-funded study to develop a hybrid closed-loop (HCL) system that uses treat-to-range algorithms that will enable pumps to apply insulin therapy more effectively.
Nektar Therapeutics (NKTR)
Nektar is a mid-cap biotech company that develops treatments for cancer, chronic pain, and auto-immune diseases. Shares of Nektar have seen better days. In 2018, NKTR was trading above $100. Since then, it has been a rough ride for Nektar shareholders. The stock lost over 60% of its worth in the 52 weeks following the all-time highs. Share prices have been calming as of late, however, so this bear run could end up being a buying opportunity if Nektar can get it together.
Prescription opioid painkillers jump-started the American opiate epidemic, and heightened awareness has led to increased research into chronic pain treatments with lower potential for abuse. Nektar is one of the companies developing the next generation of chronic pain treatments. It is developing a partial analgesic opioid pain medication that is currently in Phase III trials for the treatment of moderate to severe chronic pain. Partial analgesics have less potential for abuse than full analgesic opiates, like oxycodone and heroin. It’s only one of several drugs the company is currently developing.
Novocure Ltd. (NVCR)
Novocure is the only international biotech firm on our list of best biotech stocks. The company is based in the United Kingdom island of Jersey, and it has a market cap of about $4.2 billion. Founded in 2000, Novocure does business in several major international markets, including the EU and Japan. In addition to development, the company also manufactures and markets its drugs.
Currently, Optune is Novocure’s primary therapy product. Used to treat different types of solid tumors, Optune is a “Tumor Treating Fields delivery system” for adults with Glioblastoma. The company also has products undergoing clinical trials. It’s researching drugs for the treatment of diseases like brain metastases, pancreatic cancer, mesothelioma, and more.
iShares NASDAQ Biotech ETF (IBB)
If you want biotech exposure without biotech risk, consider buying an ETF like the iShares NASDAQ Biotech ETF from Blackrock. It’s a weighted fund that holds every company in the NASDAQ Biotechnology Index. The fund’s largest holdings include some of the best names in biotech. Its top three holdings are Celgene, Gilead Sciences (GILD), and Amgen. An exchange-traded fund like IBB allows you to reduce single-stock exposure while holding the best companies in the sector.
If you like the biotech sector and you think the industry will grow over the coming years, the IBB is a lower-risk way to play that trend. The IBB tracks the NASDAQ Biotechnology Index, so buying it is a great way to make a diversified investment in the whole sector. If you have a low appetite for risk but want biotech exposure in your portfolio, the IBB is the type of biotech stock that you should be considering.
The biotech sector is an exciting place to make an investment. These companies are on the cutting edge of the medical sector, and they are developing medications that are improving the quality of life for millions of people around the world. However, a noble pursuit is not necessarily a profitable one. The majority of biotech startups do not mature into profitable companies. Developing new treatments is expensive, so biotech companies tend to burn capital quickly. It’s not uncommon for small startups to close their doors because they simply ran out of money. The biotech sector takes the phrase, “here today, gone tomorrow” to another level.
If you’re going to invest in biotech, it’s extremely important that you do your homework. Learn about the businesses and the product pipelines before you make an investment. You need to understand the products, the clinical testing process, and the company’s business model if you want to get a complete picture of your investment. Fortunes are made and lost in biotech stocks, so it’s extremely important that you stay skeptical and informed. Buy quality companies and stick to your trading strategy if you want to make profitable trades in the biotech sector. With a little luck, you could be in the next biotech stock that explodes into new all-time highs.
What do you think of our picks for the best biotech stocks? What small-cap biotech stories are you following? Whatever you think, let us know by leaving a comment below.