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4 Top Biotech Stocks to Watch as Economic Recovery Picks Up Pace

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The biotech industry’s performance in the year so far has been decent as most of the bigwigs in the sector witnessed sales revival in the second quarter after a soft first quarter and provided an encouraging outlook for the remainder of the year. While the coronavirus treatments remain in focus, regulatory and pipeline developments are getting back on track with new drug approvals as the economic situation improves. Moderna (MRNA - Free Report) and Regeneron (REGN - Free Report) are leading the race when it comes to coronavirus treatments.

Vertex Pharmaceuticals (VRTX - Free Report) and Horizon Therapeutics (HZNP - Free Report) are also well poised on solid portfolio and pipeline progress.  


Industry Description

The Zacks Biomedical and Genetics industry includes biopharmaceutical and biotechnology companies that develop high-profile drugs using path-breaking technology. 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 drug industry.

3 Trends Shaping the Future of Biotech Industry

Innovation, Execution Hold the Key: As only a few companies in this industry have approved drugs in their portfolio, the focus is primarily on the performance of these high-profile drugs and pipeline development. Most companies spend millions and billions to create a drug with path-breaking technology, which leads to significant research & development expenditure and it takes several years before a biotech company turns profitable. Additionally, successful commercialization holds the key to drugs’ higher uptake as smaller biotechs generally lack funds and expertise to execute the same. This, in turn, prompts collaboration deals with either pharma or biotech bigwigs, wherein sales are shared or royalties are received. Moreover, it might take quite a few years for any newly-approved drug to contribute significantly to its company’s top line.

Consolidation to Fight Slowdown: Consolidation has always taken the center stage in the biotech industry and this has been an important trend, as leading pharma/biotech companies look to diversify their revenue base in the face of dwindling sales of high-profile drugs. However, the scale and pace of M&A activity have slowed down significantly of late due to the pandemic. The focus, this year, is mainly on forging alliances for COVID-19 drugs and vaccines.

Some of the smaller biotech companies are using innovative technologies to develop either antibodies or vaccines to combat this contagion. Most of these companies have entered into collaboration deals with larger biotech or pharma players to ramp up the development of vaccines and antibodies.

Pipeline Setbacks & Competition: Pipeline setbacks are a key deterrent for biotech companies, given the exorbitant cost of developing drugs using expensive technology. Most drugs/therapies take years to gain a regulatory nod. An unfavorable outcome from a crucial trial on a promising candidate is a huge setback. The leading biotechs also face other headwinds like a decline in the sales of high-profile drugs due to intensifying competition.

 

Zacks Industry Rank Indicates Bleak 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 #195, which places it among the bottom 23% of more than 252 Zacks industries, mirroring a low-key outlook for the space, probably due to the volatility. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 industry, based on a strong portfolio/pipeline, let’s take a look at the industry’s stock-market performance and current valuation.

 

Industry Versus S&P 500 & Sector

The Zacks Biomedical and Genetics industry, which is a 479-stock group within the broader Zacks Medical sector has underperformed the S&P 500 Index but outperformed the sector in the year so far.

While the stocks in this industry have lost 0.6%, the Zacks Medical sector has lost 4.2% but the S&P 500 composite has gained 17.2% during this time frame.

                                            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 trailing 12-month price-to-sales ratio (P/S TTM), which is commonly used for valuing biotech companies with approved portfolios of drugs, the industry is currently trading at 2.68 compared with the S&P 500’s 4.93 and the Zacks Medical sector's 2.79.

Over the last five years, the industry has traded as high as 3.80X, as low as 2.33X and at a median of 3.10X, as the chart below shows.
 

                              Trailing 12 Month Price-to-Sales (P/S) Ratio

4 Biotech Stocks Worth to Keep an Eye on

Regeneron has delivered a strong performance so far in the year owing to a stupendous contribution from REGEN-COV, its antibody cocktail for COVID-19.  The company’s efforts to expand the label of existing drugs and concurrently develop the pipeline is reaping rewards. Demand for ophthalmology drug, Eylea, revived significantly this year after a slowdown last year. Asthma drug, Dupixent, developed in partnership with Sanofi, maintains its stellar performance. Immunotherapy drug, Libtayo, is off to a good start and the recent label expansions should further fuel sales. Moreover, an outstanding incremental contribution from REGEN-COV, its antibody cocktail for COVID-19, has significantly boosted the top line in the last couple of quarters and should propel sales as the pandemic continues.

The consensus estimate for 2021 earnings has increased from $53.22 to $59.80 over the past 30 days. Regeneron currently sports a Zacks Rank #1 (Strong Buy).   You can see the complete list of today’s Zacks #1 Rank stocks here.   

                                                      Price and Consensus: REGN

Moderna has had a magnificent year so far, riding high on the success of its COVID-19 vaccine.  Shares have soared 321.9% in the year so far. The company’s COVID-19 vaccine, mRNA-1273, has witnessed robust demand following its authorization in multiple countries. Significant product sales have boosted the top line. Demand should stay strong as most countries ramp up the vaccination programs and the company has advanced purchase agreements with multiple countries for initial doses. The company is seeking full approval for the vaccine and is also focused on expanding the vaccine’s label. Further, Moderna is developing several promising candidates as therapies and vaccines targeting oncology indications and rare diseases.

Moderna currently carries a Zacks Rank #2 (Buy). The consensus estimate for 2021 earnings has increased 13 cents over the past 30 days to $29.17.

                                                       Price and Consensus: MRNA

Vertex Pharmaceuticals boasts a market-leading portfolio of cystic fibrosis (CF) products like Trikafta (elexacaftor/tezacaftor/ivacaftor and ivacaftor), Symdeko/Symkevi (tezacaftor/ivacaftor and ivacaftor), Orkambi (lumacaftor/ivacaftor) and Kalydeco (ivacaftor). These products continue to drive growth for the company. Triple therapy, Trikafta/Kaftrio’s early approval and strong launch have boosted Vertex. Approval of the triple therapy in more regions, additional reimbursement agreements for Kaftrio in EU countries, and approval of all CF medicines for additional mutations and younger patient populations should further boost the company.

Vertex currently carries a Zacks Rank #2. The consensus estimate for 2021 earnings has increased $1.15 over the past 60 days to $12.37.

                                                          Price and Consensus: VRTX

Horizon got a boost with the FDA’s approval of Tepezza as a treatment for patients with thyroid eye disease (TED), and Krystexxa too promises potential. Tepezza saw a strong re-launch as well as continued growth after a temporary short-term disruption in the supply. Horizon is working on label expansion for several of its drugs, which is likely to further boost sales upon potential approval. Strategic acquisitions and other efforts the company has made to develop its pipeline are impressive too.

Horizon currently carries a Zacks Rank #2. The consensus estimate for 2021 earnings has increased 15 cents over the past 30 days to $4.61.

                                                         Price and Consensus: HZNP