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Biotech Investing Guide: 3 Stocks to Buy and 3 to Avoid

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The biotech sector, which has outperformed over the last few years, has not exactly had a great start this year -- the NASDAQ Biotechnology Index is down 22.2% year-to-date. Compare this to 11.9% growth during the same period last year and one wonders whether the dream run for the sector is over.

The sector has been under immense pressure over the last few months thanks to the increasing political and media focus on high price tags for new drugs as well as the changing competitive scenario.

Last year, the FDA approved the first biosimilar in the U.S., opening the floodgates for additional such products to enter the market. Several companies are currently working on bringing in biosimilar versions of multi-billion dollar revenue-generating products like Enbrel and Humira among others.

Meanwhile, the drug pricing issue is not likely to die down easily – at least not until election is over. While presidential candidates may have differing opinions about other issues, all are pretty much on the same page where the high prices of drugs are concerned. Proposed health care plans include suggestions on how to rein in the prices of new drugs.

Is it all Bad News for the Biotech Sector?

Not really -- fundamentals remain strong with companies like Gilead, AbbVie (ABBV - Free Report) and Amgen continuing to deliver on their pipeline while key products continue to perform well. With valuations approaching reasonable levels, we could see several merger and acquisition (M&As) agreements being announced as the year progresses. Quite a few of the major biotech companies are rumored to be on the look-out for suitable deals.

Moreover, biotech companies continue to work on bringing innovative new treatments to market and there could be significant catalysts this year in the form of important new product approvals as well as major data read-outs. Sales of products that gained approval last year as well as line extensions should ramp up this year and boost growth. Some recently approved products with blockbuster potential include Vertex’s cystic fibrosis treatment, Orkambi, Amgen’s PCSK9 inhibitor, Repatha, Regeneron/Sanofi’s PCSK9 inhibitor Praluent and Gilead’s Genvoya (HIV). Cancer treatments like Kyprolis and Imbruvica should also bring in more sales thanks to label expansions.

3 Biotech Stocks to Add to Your Portfolio

Anyone interested in biotech stocks will know that it could be challenging to pick winners in this industry which is constantly growing and changing. While the major price correction has resulted in attractive valuations, we nevertheless advise investors to exercise caution while selecting stocks. Factors like pipeline setbacks, competition and regulatory actions could change the story overnight for seemingly well positioned stocks.

However, based on favorable Zacks Ranks, we have zeroed in on 3 biotech stocks with strong fundamentals and growth potential.

First on our list is Foster City, CA-based Gilead Sciences Inc. (GILD - Free Report) . Gilead, a Zacks Rank #2 (Buy) stock, has been consistently seeing upward revisions in earnings estimates. Gilead’s performance has been impressive with the company surpassing earnings expectations all throughout 2015. The company, which is well known for its presence in the hepatitis C virus (HCV) market, also has a strong hold in the HIV market. In addition to having several blockbuster products in its portfolio, Gilead has a strong late-stage pipeline.

Celgene Corporation (CELG - Free Report) , another Zacks Rank #2 stock, looks well-positioned for growth. Revlimid should continue performing well driven by increased duration of treatment and market share gains. Celgene also has a strong and diversified pipeline that bodes well for long-term growth. The Summit, NJ-based company has been making prudent acquisitions and entering into deals to bolster its pipeline.

Thousand Oaks, CA-based Amgen Inc. (AMGN - Free Report) is another Zacks Rank #2 stock with a strong earnings track record. The company has already started the year on a strong note by raising its outlook. While legacy products will continue contributing to the top-line, Kyprolis looks well-positioned to gain share with both the ASPIRE and ENDEAVOR data in its U.S. label. Amgen’s pipeline is also progressing with quite a few candidates under regulatory review and important late-stage data readouts lined up for 2016. A big catalyst this year could be positive top-line data from the ongoing phase III cardiovascular outcomes study data on PCSK9 inhibitor, Repatha.

3 Names to Avoid

We recommend avoiding names that offer little growth or opportunity for a take-out or are developing drugs that are likely to face regulatory hurdles, and which carry a Zacks Rank #4 (Sell) or Zacks Rank #5 (Strong Sell).

Tarrytown, NY-based Regeneron Pharmaceuticals, Inc. (REGN - Free Report) , a Zacks Rank #5 stock, delivered disappointing fourth quarter results and is witnessing downward revisions in earnings estimates.  The company’s recently launched PCSK9 inhibitor, Praluent, performed well below expectations and its launch trajectory is slated to be slower than expected. Moreover, the growth trajectory of the company’s key drug, Eylea, is expected to slow down this year.

San Diego, CA-based Arena Pharmaceuticals, Inc. (ARNA - Free Report) is facing challenges growing sales of its obesity treatment, Belviq. Although there is significant unmet need in the obesity market, certain issues remain. These include the tendency of healthcare providers to treat symptoms of obesity rather than the disease itself, a narrow focus on certain patient types for treatment and historically low third-party insurance coverage. All these factors could limit uptake of the drug.

In fact, on the third quarter 2015 update, Arena’s partner Eisai had acknowledged challenges in the U.S. anti-obesity market - Arena said that Eisai expects slow growth in the obesity market in general with Belviq expected to continue to grow slowly until results from the cardiovascular outcomes trial (CVOT) are out and included in the product label, if positive. But results from the CVOT study are not expected until 2018. Moreover, competition in the obesity market is increasing with the entry of treatments like Saxenda and Contrave. This Zacks Rank #4 stock has been witnessing downward estimate revisions.

Cambridge, MA-based Momenta Pharmaceuticals Inc. (MNTA - Free Report) , a Zacks Rank #4 stock, is facing challenges in growing sales of Glatopa, its generic version of Teva’s once-daily Copaxone 20 mg. Teva has switched about 75% of its 20 mg patients to the thrice-weekly 40 mg formulation of Copaxone. Moreover, with Teva aggressively defending the remaining share for the 20 mg formulation, it may be a while before Glatopa sales pick up.

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