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Biotech Industry Near-Term Outlook Modest Amid Coronavirus

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The Zacks Biomedical And Genetics industry includes biopharmaceutical and biotechnology companies that develop high-profile drugs. These biologically processed drugs, which address virology, neuroscience, metabolism and rare diseases, are manufactured using live organisms. The main goal of biotech companies is to use innovative technology to create breakthrough treatments. Quite a few companies in this space work on vaccines as well.  Given the dynamic and evolving nature of technology, the sector is perceived to be riskier than the more stable large-cap pharma or the drug industry.

Here are the industry’s three major themes:
 

  • As only a few companies in this space have approved drugs in their portfolio, the focus is primarily on the performance of these high-profile drugs and product pipelines. Most companies spend millions to create a drug with path-breaking technology, which increases the R&D expenditure. Additionally, a successful commercialization holds the key to the drug’s higher uptake as smaller biotechs generally lack funds and expertise to execute the same. This, in turn, leads to collaboration deals with the bigwigs wherein sales are shared or royalties received. Moreover, it may take quite a few years for any newly-approved drug to contribute significantly to its company’s top line.
     
  • Consolidation has always taken centerstage in the biotech industry and this was an important trend in this dynamic sector last year as leading pharma/biotech companies looked to diversify their revenue base in the face of dwindling sales of high-profile drugs. However, the scale and pace of M&A activity slowed down significantly in 2020 after its huge rage last year. The focus this year is mainly on forging alliances for COVID-19 drugs and vaccines. Quite a few smaller biotech companies are using innovative technologies to develop either antibodies or vaccines to combat this contagion as well as cure the infected at the earliest. Most biggies in the industry are developing treatments or vaccines for this deadly disease and investing a significant chunk of their R&D spends on the same. Innovative therapies like stem cell therapy are also being evaluated to treat the infection. Given the alarming levels of the COVID-19 spread and its severity, some approved drugs are being tested or repurposed to see their effectiveness in treating the infected patients. Moreover, some major companies teamed up with smaller biotechs, which possess innovative technologies to develop the coronavirus-related treatments.
     
  • However, pipeline setbacks are a key deterrent, given the exorbitant cost of developing a drug using expensive technology. Most drugs take years to gain a regulatory nod. An unfavorable outcome from a crucial trial on a promising candidate can spell doom for that particular biotech player. Other headwinds faced by the industry include government scrutiny of high drug prices and a decline in the sales of high-profile drugs due to intensifying competition.

The coronavirus pandemic brought the world to a standstill. The performance of the biotech industry was weak in the first half of the year as people around the world postponed doctor visits and opted out of regular surgical procedures and treatments in the wake of the COVID-19 outbreak. This, in turn, impacted the drug sales. Moreover, most clinical trials being halted already will delay their completion and approval. Nevertheless, the majority of companies expect a recovery toward the end of this year.

While the drugs and vaccines will need some time to be tested and a cure is not imminent, investors will keep an eye on these companies as the pandemic is not likely to die down soon. A positive outcome from any of the ongoing studies will lend a significant boost to the respective company. Some prominent names in the industry include Biogen (BIIB - Free Report) , Amgen (AMGN - Free Report) and Incyte Corporation (INCY - Free Report) .

Zacks Industry Rank Indicates Moderate Prospects

The group’s Zacks Industry Rank is basically the average of the Zacks Rank of all the member stocks.

The Zacks Biomedical and Genetics industry currently carries a Zacks Industry Rank #181, which places it among the bottom 28% of more than 252 Zacks industries, mirroring a low-key outlook for the space. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Before we present a few biotech stocks that are well positioned to beat the market, let’s take a look at the industry’s stock-market performance and its current valuation.

Industry Outperforms Sector But Lags S&P 500

The Zacks Biomedical and Genetics industry, which is a 383-stock group within the broader Zacks Medical Sector, has outperformed the sector it belongs to but has lagged the S&P 500 Index on a year-to-date basis.

While the stocks in this industry have collectively gained 1.3%, the Zacks S&P 500 composite and the Zacks Medical sector have increased 8.1% and 0.3%, respectively. The spotlight on the sector due to the pandemic boosted its prospects in the hope of a possible treatment or a vaccine to arrive shortly. 

                                  Year-to-Date Price Performance

Industry’s Current Valuation

Since most companies in the biotech sector do not have approved drugs, valuing these companies becomes a complex process. On the basis of the forward 12-month price-to-sales ratio (P/S F12M), which is commonly used for valuing biotech companies with an approved portfolio of drugs, the industry is currently trading at 2.74 compared with the S&P 500’s 3.81 and the Zacks Medical sector's 2.81.

Over the last five years, the industry has traded as high as 3.25X, as low as 1.93X and at a median of 2.72X as the chart below shows.

                                Forward Price To Sales Ratio

                    

 

Bottom Line

The biotech industry is continuously evolving and is largely volatile in nature. It has been grabbing attention of late due to the coronavirus outbreak. The spotlight is particularly on those companies, which are developing treatments/vaccines for the same. Most companies performed relatively well amid the massive global stock sell-off. Notably, smaller biotechs are also striving to develop treatments to fight this pandemic. This, in turn, led to share price appreciation of small biotech stocks, which are well-equipped with path-breaking technologies. We expect this positive momentum to continue in the near term as well.

The industry currently has quite a few stocks, which carry either a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). Here we list a few such stocks that have also been witnessing positive earnings estimate revisions.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Boston, MA-based Vertex Pharmaceuticals Incorporated (VRTX - Free Report) currently sports a Zacks Rank of 1 and has rallied 25.3.3% in the year so far. The Zacks Consensus Estimate for current-year EPS has risen 12.3% over the past 30 days.

                                                       Price and Consensus: VRTX

Tarrytown, NY-based Regeneron Pharmaceuticals, Inc. (REGN - Free Report) currently carries a Zacks Rank #2 and has soared 63.7% in the year so far.  The Zacks Consensus Estimate for earnings has moved 19.9% north over the past 30 days.

                                                   Price and Consensus: REGN

Thousand Oaks, CA-based Amgen is one of the leading biotech companies in the world. The Zacks Consensus Estimate for current-year EPS has been revised 0.5% upward over the past 30 days. Amgen carries a Zacks Rank #3. The stock has gained 4.9% so far this year.

                                                    Price and Consensus: AMGN

Foster City, CA-based Gilead Sciences (GILD - Free Report) is currently a #3 Ranked player. The stock has inched up 0.8% in the year so far. The Zacks Consensus Estimate for current-year EPS has been raised 4.5% over the past 30 days.

                                                    Price and Consensus: GILD

 

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