The COVID-19 pandemic started a frenzy in biotech investment and innovation. During the pandemic, biotech stocks became the hot new tech sector, driving a wave of capital and giving rise to record IPOs and financings. Within that period, the S&P 500 jumped by about 47% from the increased interest in novel life-saving technologies and therapeutics.
Moreover, the iShares Biotechnology ETF surged 62% between 2019 and 2021, beating the already impressive performance of the S&P 500.
As we emerge from the pandemic that brought forth a concerted effort between biotech companies, governments, and medical institutions, we wonder, “Where is the biotech industry headed? Are we looking at continued growth or consolidation?”
Having proven that certain drugs—such as vaccines and monoclonal antibodies (mAbs) specific to a new pathogen—can be delivered quickly to solve a global emergency, what does the future look like? For investors, what are the bright spots in biotech and biopharma now that the world is learning to live with the SARS-CoV-2 virus?
The Biotech Outlook Post-COVID
Today, attention is shifting from vaccination to biological therapeutics with the potential to treat chronic conditions. As the world begins to readjust to a changed perspective in disease control and treatment, it is also facing new economic realities and playing catch-up with other health problems outside of COVID.
Vaccine makers Pfizer and Moderna went on a massive growth streak during the pandemic years. However, as of mid-September 2023, Moderna (MRNA) became a poorly performing stock on the S&P 500, with shares dropping 9%. Pfizer (PFE) shares also took a hit as their CFO David Denton said the outlook for vaccine rates got a haircut in 2023.
Scientists remain intent on solving numerous problems in bioscience. Investors recognize that it is time to refocus on the broader picture of health and medical issues and other biotech sub-sectors offering promise. There remains a diverse range of areas with massive markets for new opportunities in biotech investment.
How To Spot Opportunities in The Biotech Sector
Biotech is typically a hotbed of speculation and mergers and acquisitions (M&As). While the sector can experience wild swings, it offers a singular opportunity for investors to participate in medical and scientific advancements with their potential for rewards.
People invest in biotech companies because they have innovation at their core, being at the forefront of the newest technologies in the health sciences. They drive breakthroughs in genetics, infectious disease treatment, chronic disease therapy, and many other fundamental problems. They also offer massive growth potential. Biotech companies, while coming with their risks, can provide exponential growth when they dominate the market.
When picking the top biotech stocks, it’s essential to understand how to select winning companies. Here are some fundamental factors to assess:
Market potential
For drugs or therapeutics, the market size or the size of the target patient population is crucial to assessing the product’s potential success. Review the number of patients with the condition it targets, the competitive landscape, and the company’s pricing strategy. The companies that pioneer solutions that address primarily unmet needs in new markets have better chances of success.
Intellectual Property Ownership
Intellectual Property (IP) is critical for cornering the market. Robust IP protection can provide a tremendous competitive advantage for a company, giving it a head start while raising the barriers to entry for competitors. Conversely, companies with weak IP strategies fail to profit from their products. Hence, the strength of a company’s IP portfolio—its brands, patents, and exclusivity agreements—is foundational to its value and growth.
Success of clinical trials
You need to evaluate ongoing and completed clinical trials. These studies show the effectiveness of the solution or drug and determine the likelihood of regulatory (FDA) approval. Learn to review trial outcomes, trial design, endpoints, and target patient populations.
Diversity of product portfolio and pipeline
The most robust biotech companies possess diverse drug candidates. In other words, such companies focus on more than one disease or solution. Review each project and investigate their products’ market size, development stage, and therapeutic areas. Specifically, look for projects in advanced stages (Phase II or III clinical trials). These tend to be more promising.
Competitive positioning
Many products, however promising, have competitors. Analyze how competitors offer alternative or similar solutions for a medical problem or a disease. Unique mechanisms of action, groundbreaking technologies, or superior efficacy signal high investment potential and allow a drug to stand out in the market.
Financial health
It can often take time for a company to produce a groundbreaking drug. Drug development can be costly and lengthy, so make sure the company is financially stable. No matter how promising their innovations are, they need to have sound finances—adequate cash reserves, manageable debt, and a source of revenue growth while simultaneously developing new products.
Regulatory approvals
Keep track of how well the company can achieve its targets and obtain the necessary regulatory approvals to push its product promptly. Aside from tracking clinical trials, you must monitor advisory committee meetings, FDA approvals, and other interim approvals like EUA or Emergency Use Authorization.
Unique risks and challenges
Every biotech sub-sector has challenges and risks unique to its technology and pipeline. There are also general risks, like market competition, failed clinical trials, and regulatory issues. One way to minimize risk is to diversify your portfolio.
Biotech Stocks To Consider in 2023
In 2023, biotech portfolios should diversify across technologies and addressable markets and look beyond vaccine products for new opportunities.
Regeneron Pharmaceuticals
Regeneron (REGN) became a familiar name during the pandemic due to its monoclonal antibodies or mAbs. The US FDA approved Regeneron’s REGEN-COV monoclonal antibody therapy for preventive use, specifically post-exposure prophylaxis for COVID-19. The treatment contributed $6.2 billion in revenue in 2021.
REGN remains among the best-performing stocks to date. REGEN-COV is becoming less significant as it failed to show efficacy towards the omicron variant. However, the company has other money makers that are driving it today.
Eylea is a drug that targets ocular disease, with doctors prescribing it for conditions like macular edema and diabetic macular edema. It has been the company’s most significant contributor to revenue in 2022—adding $5.8 billion to its bottom line. Regeneron manufactures this drug in partnership with Bayer (BAYRY). The US net sales from Eylea are awarded to Regeneron. Revenue outside the US is split with Bayer.
The company has a lucrative collaboration with Sanofi (SNY) as well. Sanofi and Regeneron work together on Dupixent and Kevzara, which target autoimmune diseases. Cancer drugs Zaltrap, Libtayo, and Praluent, a cholesterol drug, are also products of this partnership.
Throughout 2021, REGN generated $16.1 billion in revenue, an 89% growth over 2020. For fiscal 2022, analysts forecasted a slowdown of around $11.7 billion in revenue. The company is expected to report higher revenue in 2023.
Vertex Pharmaceuticals
Over the last five years, Vertex (VRTX) reported a high EPS growth with an average of 56% annual increase. While growth is expected to slow, the company’s fundamentals appear solid.
Currently, the company has six approved therapies. In addition, it has four drugs in Phase IV of testing and about 20 in the pipeline, between early-stage research and Phase III of testing. Some treatments address sickle cell disease, cystic fibrosis, and diabetes. The company’s sales are expected to grow by 6.8% in 2024.
Biogen
Biogen (BIIB) has experienced challenges in recent years, foremost of which is the controversial approval of Adulhelm, its Alzheimer’s disease drug. Adulhelm failed to get enough traction in the market due to questions about its efficacy. Japanese and European authorities rejected it, thus reducing its market further. It is not covered by the Centers for Medicare and Medicaid Services (CMS) and remains unsupported by many insurers.
The company’s multiple sclerosis (MS) drug, Tecfidera, faces stiff competition from generics. The MS drug accounted for approximately 25% of Biogen’s revenue last year, but the availability of generics is expected to reduce sales in 2023.
Despite these challenges, BIIB remains a leading biotech stock focused on neurodegenerative diseases, a significant global market that could increase given aging populations worldwide. The company has consistent revenue from its royalties, including its franchise of the MS drug Ocrevus.
The expiration of Tecfidera’s patent and revenue decline due to other factors have already been priced in on its recent 55% drop from all-time highs. Biogen has aggressively made deals to counter its recent setbacks, including 20 acquisitions, development, and licensing deals over the past five years.
Using the POWR rating system, BIIB still has a Value Grade of A. BIIB’s P/E or price-to-earnings ratio is 13.6x, which makes it much cheaper than the S&P 500, signaling opportunity.
To Be A Better Biotech Investor, Boost Your Scientific Literacy
The above stocks are examples of companies with focus, quality, and future growth potential. Despite the numerous challenges in the biotech sector, some indicators and criteria put you on the path to better biotech investing.
If you want to allocate a portion of your portfolio to biotech stocks, you must stay informed of new developments and hone your skills beyond non-specialist’s understanding. A sharp biotech investor possesses a unique combination of scientific knowledge and financial acumen, and those who master both can unlock significant returns in this sector.
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