There is no doubt that 2016 has been a pretty tumultuous year for biotech stocks with the sector facing a lot of flak for rising drug prices. The sector has been under pressure for more than a year now though shares did rally post elections in November. Immediately after election results were announced, the NASDAQ Biotechnology Index jumped almost 9% in a single day reflecting hopes that drug pricing would not be a key focus area under a Donald Trump presidency.

However, the relief rally turned out to be short-lived with President-elect Trump recently saying that his intentions may have been misread by some stock analysts. In an interview with TIME magazine, which has named him “2016 Person of the Year”, Trump said that his goal has not wavered -- he does not like what happened to drug prices and he will bring down drug prices. Needless to say, that statement left biotech investors jittery with concerns regarding drug pricing taking the spotlight once again.

So, should investors keep away from biotech stocks on pricing concerns? Not really. Admitted, there will be a lot of volatility in this sector in the coming months given the lack of details regarding Trump’s plans for the sector, but the key fundamentals remain unchanged.

Strong pipelines, innovative treatments, impressive results, growing demand for drugs especially for rare-to-treat diseases, an aging population and increased health care spending should support growth in this sector. Moreover, Trump’s pro-business stand is also expected to benefit the sector. Major biotech and pharma companies should gain from Trump’s proposed tax plan and proposal to repatriate corporate profits held offshore at a one-time tax rate of 10%.

In our view, stocks with exciting pipelines, a proven track record, balanced risk-reward profiles and a favorable Zacks Rank -- #1 (Strong Buy) or 2 (Buy) -- make for good choices.

Our Picks

Celgene Corporation : Summit, NJ-based Celgene is focused on the discovery, development and commercialization of innovative therapies for the treatment of cancer and inflammatory diseases through next-generation solutions in protein homeostasis, immuno-oncology, epigenetics, immunology and neuro-inflammation. While blood cancer treatment, Revlimid, is the key contributor to the top-line and continues to deliver impressive growth, Celgene has been diversifying its portfolio with other drugs like Pomalyst and Otezla performing well too. Otezla (psoriasis, active psoriatic arthritis) has immense potential with sales being driven by demand, growing market share and an expanding global footprint. The product is comfortably on track to achieve blockbuster status in 2016.   

Not just that, Celgene has a rich and promising pipeline. In addition to working on expanding the labels of currently marketed products like Revlimid and Otezla, the company has several late-stage candidates including ozanimod (ulcerative colitis and relapsing multiple sclerosis) and GED-0301 (Crohn’s disease) in the inflammation and immunology therapeutic area and CC-486 (myelodysplastic syndromes and acute myeloid leukemia), enasidenib (acute myeloid leukemia) and luspatercept (myelodysplastic syndromes and beta-thalassemia) within hematology. What makes the pipeline more attractive is that quite a few of these candidates have blockbuster potential.

Celgene’s year-to-date (YTD) price performance shows that although the company has witnessed ups and downs over the course of the year, overall it has outperformed the Zacks categorized Medical/Biomedical Genetics industry. Like other biotech stocks, Celgene saw a significant surge in its share price following the election results reflecting investor relief at a non-Clinton presidency.

Regeneron Pharmaceuticals, Inc. (REGN Quick QuoteREGN - Free Report) : Tarrytown, New York-based Regeneron is focused on developing treatments for areas with unmet medical need including eye disorders, cholesterol management, rheumatoid arthritis (RA), asthma, atopic dermatitis, pain, cancer, and infectious diseases.

The company’s flagship product, eye treatment Eylea, continues to be the key financial driver. Eylea should continue to be driven by factors like demographics, an aging population and a higher number of patients with diabetic eye disease. Moreover, the competitive scenario for Eylea has improved with the recent failure of Ophthotech Corporation’s anti-PDGF therapy Fovista for wet age-related macular degeneration (AMD).

Meanwhile, though PCSK9 inhibitor, Praluent, is yet to show a significant ramp up in sales with scrips continuing to be impacted by reimbursement hurdles for physician offices and patients, positive cardiovascular outcomes data on the treatment would help boost sales significantly.

Regeneron has been working on its pipeline and has sixteen product candidates in development including label expansion efforts for Eylea. A key catalyst for the company would be the FDA approval of Dupixent, currently under priority review for atopic dermatitis with a response expected on Mar 29, 2017. Dupixent, which has blockbuster potential, is being investigated for other indications as well including asthma, nasal polyps, and eosinophilic esophagitis. Regeneron is also looking to grow its ophthalmology segment and is evaluating Eylea in combination with other treatments.

Although Regeneron has underperformed the Zacks categorized Medical/Biomedical Genetics industry, the failure of Fovista, a potential competitor, removes a major overhang on the shares.

Exelixis, Inc. (EXEL Quick QuoteEXEL - Free Report) : South San Francisco, CA-based Exelixis is focused on developing and commercializing small molecule therapies with the potential to improve the treatment of cancer. The company has had a phenomenal run in 2016 outperforming the Zacks categorized Medical/Biomedical Genetics industry by a huge margin.

Recently approved Cabometyx had a strong full quarter driven by METEOR data and commercial execution. The product already has a 19% share in the second line metastatic kidney cancer market and 35% of the third-line segment. A major catalyst for the stock would be approval for the first-line indication – the company has already presented pretty impressive results in October for the first-line patient population and is looking to seek approval for this indication. The first-line patient population represents huge commercial potential.

Exelixis is evaluating Cabometyx in several studies for different types of cancer and has other candidates in its pipeline including CS-3150 (partnered with Daiichi Sankyo). Exelixis has made significant progress towards its goal of becoming a profitable, fully integrated, commercial company.

While Celgene, Regeneron and Exelixis are all Zacks Rank #2 stocks, you can see the complete list of today’s Zacks #1 Rank stocks here.

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