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Focus on Coronavirus Treatments to Boost Biotech Stocks

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The Zacks Biomedical And Genetics industry includes biopharmaceutical and biotechnology companies that develop high-profile drugs. These biologically processed drugs, addressing 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 drugs. 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.

Here are the three major industry themes:

  • Since only a few companies in this space have approved drugs, 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, successful commercialization holds the key to the success of the drug as smaller biotechs generally lack funds and expertise to do the same. This, in turn, leads them to sign collaboration deals with bigwigs and share sales or pay royalties. Moreover, it may take quite a few years for any newly approved drug to contribute significantly to the top line. Consolidation too was an important trend in this dynamic sector in 2019 as leading pharma/biotech companies looked to diversify their revenue base.
     
  • The coronavirus pandemic has shifted the focus to this space for the time being. The focus now is on developing vaccines/treatments to combat the contagion and cure the infected at the earliest using innovative technologies. Most bigwigs in the industry are either 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 spread and severity, some approved drugs are being tested or repurposed to see if they are effective in treating infected patients. Moreover, some big companies have teamed up with smaller biotechs, which possess innovative technologies to develop coronavirus treatments.
     
  • However, pipeline setbacks are a major deterrent, given the huge cost of developing a drug using expensive technology. Most drugs take years to gain approval. An unfavorable outcome from a key trial on a promising candidate can spell doomsday for that particular biotech player. Other headwinds faced by the industry include government scrutiny for high drug prices and a decline in sales of high-profile drugs due to increasing competition.

The coronavirus pandemic has brought the world to a standstill. The performance of the biotech industry is likely to be negatively impacted in the first half of the year as most part of the world is under lockdown, causing supply-chain disruptions and affecting sales of drugs for other treatments. Moreover, most clinical trials have been halted, which will delay their completion and approval. 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 out soon. A positive outcome from any of the ongoing studies will be a significant boost for the respective company. Some prominent names in the industry include Gilead Sciences (GILD - Free Report) , Amgen (AMGN - Free Report) and Incyte (INCY - Free Report) .

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 #10, which places it in the top 4% of more than 255 Zacks industries. 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.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate.

Before we present a few biotech stocks that are well positioned to outperform the market based on a strong earnings outlook, let’s take a look at the industry’s stock-market performance and current valuation.

Industry Outperforms Sector & S&P 500

The Zacks Biomedical and Genetics industry, which is a 349-stock group within the broader Zacks Medical Sector, has outperformed both the S&P 500 and the sector it belongs to on a year-to-date basis.

While the stocks in this industry have collectively gained 3.3%, the Zacks S&P 500 composite and the Zacks Medical sector have declined 12.1% and 3.3%, respectively. The spotlight on the sector due to the pandemic has boosted its prospects in hope of a possible treatment. 

        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 forward twelve months price-to-sales ratio (P/S F12M), which is commonly used for valuing biotech companies with approved drugs, the industry is currently trading at 2.93 compared with the S&P 500’s 4.77 and the Zacks Medical sector's 2.78.

Over the last five years, the industry has traded as high as 3.18X, as low as 2.05X and at a median of 2.62X, as the chart below shows.

                                     Forward Price to Sales ratio

 

 

Bottom Line

The biotech industry is continuously evolving and largely volatile. It has been in the spotlight in recent times due to the coronavirus outbreak. The spotlight is particularly on companies, which are developing treatments/vaccines for the same. Most of these companies have performed relatively well amid the massive stock sell-off globally. Notably, smaller biotechs are also striving to develop treatments to fight this pandemic. This, in turn, has driven the share price of small biotech stocks, which are well equipped with path-breaking technologies. We expect the 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) or 2 (Buy). 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.

Cambridge, MA-based Biogen (BIIB - Free Report) is one of the leading biotech companies in the world. The consensus mark for this Zacks #2 Ranked player’s current-year EPS has risen 0.5% over the past seven days. However, the stock has lost 0.4% this year so far. 

                                   Price and Consensus: BIIB

Tarrytown, NY-based Regeneron Pharmaceuticals, Inc. (REGN - Free Report) currently carries a Zacks Rank #1 and has gained 50.8% in the year so far.  The Zacks Consensus Estimate for earnings has risen 4.2% over the past seven days.

                            Price and Consensus: REGN

 

Boston, MA-based Vertex Pharmaceuticals Incorporated (VRTX - Free Report) currently carries a Zacks Rank #1 and has rallied 23.3% in the year so far. The Zacks Consensus Estimate has risen 1.3% over the past 60 days.

                               Price and Consensus: VRTX

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