Things are looking better for the biotech industry in 2023 after a bumpy ride in 2022 due to the uncertain macroeconomic environment. With the risk of a recession looming large, 2023 may also see a tougher macroeconomic environment but the outlook provided by most companies indicates better prospects due to new drug approvals and regular pipeline updates. Meanwhile, most companies are looking to bolster their product portfolios through collaborations and buyouts. Hence, M&A is back in the spotlight. Given the persistent need for innovative medical treatments, irrespective of the state of the economy, the biotech industry can be a safe haven despite the inherent volatility and uncertain macroeconomic environment.

Biotech companies like CRISPR Therapeutics AG (CRSP Quick QuoteCRSP - Free Report) , Ligand Pharmaceuticals, Inc. (LGND Quick QuoteLGND - Free Report) , Theseus Pharmaceuticals, Inc and Kala Pharmaceuticals, Inc (KALA Quick QuoteKALA - Free Report) are well-poised to outperform the volatile sector.

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. As technology becomes paramount to improving global health, the main goal of biotech companies is to use innovative technology to create breakthrough treatments. Quite a few companies in this space are developing vaccines as well using modern technology. 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.

4 Trends Shaping the Future of the 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 high-profile drugs and pipeline development. Most companies spe    nd millions and billions to create a drug with path-breaking technology, which leads to significant research and development expenditure. Hence, it takes several years before a biotech company turns profitable. Additionally, successful commercialization is the key to higher drug uptake, as smaller biotechs generally lack the funds and expertise to reach the targeted population. This, in turn, prompts collaboration deals with either pharma or biotech bigwigs, wherein sales are shared or royalties are received. Moreover, it may take quite a few years for any newly-approved drug to contribute significantly to its company’s top line.

M&A in Spotlight: Consolidation has always taken center stage in the biotech industry. 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.  While the scale and pace of M&A activity slowed down over the last couple of years, the pace is likely to pick up as pharma and pharma/biotech bigwigs are evidently on the lookout to bolster their portfolios. Amgen is all set to acquire Horizon Therapeutics and Pfizer recently announced that it would acquire Seagen Inc. While oncology and immuno-oncology are the key focus areas, treatments for rare diseases and gene-editing companies also hold potential, making them lucrative investment areas. An attractive pipeline candidate is a key lure for these companies. Cost synergies in research and development are added benefits, as quite a few smaller biotech companies are using innovative technologies to develop drugs and treatments.

New Drug Approvals Boost Prospects: With the pandemic creating havoc and the focus mostly being on coronavirus treatments in the last couple of years, the industry saw a slowdown in new drug approvals for other diseases. Nevertheless, with increasing R&D spend and most companies looking to diversify, new drug approvals are likely to see an acceleration going forward.

Pipeline Setbacks & Competition Hurt: Pipeline setbacks are key deterrents 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 and particularly for smaller biotechs, which are mostly one-trick ponies. The leading biotechs face other headwinds, including declining sales of high-profile drugs due to intensifying competition.

 

Zacks Industry Rank Indicates Bright 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 #92, which places it among the top 37% of more than 248 Zacks industries, mirroring a bright outlook for the space, probably due to the consistent demand for better medical drugs/treatments. 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 is a 707-stock group within the broader Zacks Medical sector. It has underperformed the S&P 500 composite in the past year but outperformed the Zacks Medical sector.

While the stocks in this industry have declined 15.5%, the Zacks Medical sector has lost 18.3% and the S&P 500 composite has lost 13.2%.

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 2X compared with the S&P 500’s 3.47X and the Zacks Medical sector's 2.10X.

Over the last five years, the industry has traded as high as 3.31X, as low as 1.74X and at a median of 2.63X, as the chart below shows.

                                              Price/Sales TTM

 

4 Biotech Stocks Worth Buying

Ligand’s business model creates value for stockholders by providing a diversified portfolio of biotech and pharmaceutical product revenue streams that are supported by an efficient and low corporate cost structure. Ligand’s Captisol technology has resulted in partnerships with several leading drug companies, providing it with funds through milestone and royalty payments. The spin-out of its OmniAb business into a separate entity is expected to accelerate growth and improve cost structure. Concurrent with the fourth-quarter results, the company increased its guidance for 2023 (previously provided in December).

Ligand currently sports a Zacks Rank #1 (Strong Buy).

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

The Zacks Consensus Estimate for earnings per share for 2023 has increased 85 cents to $4.15. Earnings estimates for 2024 have jumped from $3.10 per share to $4.20 over the same timeframe. Ligand’s shares gained 6.9% in the last three months.

Price and Consensus: LGND

CRISPR is a leading gene editing company focused on developing CRISPR/Cas9-based therapeutics. Its lead pipeline candidate is exagamglogene autotemcel (exa-cel, formerly CTX001), an investigational ex vivo CRISPR gene-edited therapy, which is currently being evaluated in late-stage studies for treating transfusion-dependent beta thalassemia (TDT) and sickle cell disease (SCD). Regulatory submissions are completed for exagamglogene autotemcel (exa-cel) in Europe for TDT and SCD. A rolling biologics licensing application (BLA) submission is on track for completion by the end of this quarter in the United States.

CRSP’s shares have gained 9.4% so far in 2023. Loss estimates for 2023 have narrowed to $7.54 from $8.21 in the past 30 days. CRISPR currently carries a Zacks Rank #2 (Buy).

Price and Consensus: CRSP

Clinical-stage biopharmaceutical company Theseus is focused on developing therapies for cancer. Theseus' lead product candidate, THE-630, is a pan-variant KIT inhibitor for the treatment of patients with advanced gastrointestinal stromal tumors (GIST) whose cancer has developed resistance to earlier lines of kinase inhibitor therapy. The company has initiated a first-in-human study for the lead candidate, THE-630, in advanced GIST and nominated THE-349 as the development candidate for our fourth-generation EGFR inhibitor program for patients with NSCLC.

Theseus currently carries a Zacks Rank #2. Loss estimates for 2023 have narrowed to $1.74 from $1.97 in the past 30 days and to $2.06 from $2.43 for 2024. Shares of the companies have rallied 62.3% in the year so far.