It has been a decent year for the biotech industry so far, buoyed by new drug approvals and positive regulatory/pipeline updates. The third-quarter earnings season has just kicked off, with most major biotech companies scheduled to report next week. The current momentum in the industry is mostly positive, with increasing R&D spending on lucrative areas such as obesity, gene-editing technologies and rare diseases.
Companies in this volatile biotech industry continue to be in the spotlight as pharma/biotech goliaths are looking to bolster their product portfolios and pipelines through collaborations and buyouts amid generic competition for legacy drugs. Given the continuous need for innovative medical treatments, irrespective of the state of the economy, an investment in the biotech industry can be worth it, notwithstanding the inherent volatility and uncertain macroeconomic environment.
Biotech companies like Exelixis, Inc, EXEL, Blueprint Medicines BPMC, CRISPR Therapeutics CRSP, Amicus Therapeutics FOLD and Verona Pharma VRNA are poised to outperform the volatile sector.
Indutsry 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, biotech companies aim to use innovative technology to create breakthrough treatments rapidly. Quite a few companies in this space are developing drugs and vaccines using modern technology. Given the dynamic and evolving nature of technology, the sector is perceived to be riskier than the large-cap pharma or drug industry.
4 Trends Shaping the Future of the Biotech Industry
Innovation, Execution Hold the Key: The primary focus in the biotech industry is on the performance of high-profile drugs and pipeline development, as only a few companies in this industry have approved drugs in their portfolios. Most companies spend millions and billions of dollars to create a drug with path-breaking technology, resulting in significant research and development expenditures. Sometimes, modern treatments come with side effects, which surface with time, and the uptake might fail to meet the expectations. 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 the center stage in the biotech industry. This is because leading pharma/biotech companies constantly look to diversify their revenue base in the face of dwindling sales of their high-profile drugs. Acquisitions also make sense as developing a drug/technology from scratch is costly as well as risky. After a lull of almost two years, the pace of M&A has picked up from last year.
The influx of cash from big pharma/biotech companies further propels the biotech sector. Gilead Sciences earlier acquired CymaBay Therapeutics to strengthen its liver disease portfolio and Vertex Pharmaceuticals acquired Alpine Immune Sciences. Eli Lilly acquired Morphic Therapeutics for approximately $3.2 billion in August. Longboard Pharmaceuticals is all set to be acquired by Lundbeck A/S for $60 per share in cash.
While oncology and immuno-oncology are the key focus areas, treatments for obesity, rare diseases and gene-editing companies have gained traction in recent times, making them lucrative investment areas. An attractive pipeline candidate is the 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: New drug approvals witnessed a surge in 2024. The trend is likely to see an acceleration going forward on the back of continued rise in R&D spending, with most companies looking to diversify their portfolio.
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, 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 #79, which places it among the top 32% of more than 250 Zacks industries. The rank mirrors a bright outlook for the space, probably due to the consistent demand for better medical drugs/treatments, even though the macroenvironment is challenging. 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 699-stock group within the broader Zacks Medical sector. It has underperformed the S&P 500 composite and the Zacks Medical sector in the year so far.
The stocks in this industry have lost 2.5% year to date against the Zacks Medical sector’s growth of 5.6%. The S&P 500 composite has gained 22.7% in the said 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 2.15X compared with the S&P 500’s 5.67 and the Zacks Medical sector's 3.53.
Over the past five years, the industry has traded as high as 3.66X, as low as 1.81X and at a median of 2.28X, as depicted in the chart below.
5 Biotech Stocks Worth Buying
Amicus' lead product, Galafold, has witnessed strong uptake since its launch, driven by strong patient demand from both switch and treatment-naïve patients. The company’s efforts to expand Galafold's label are encouraging as well. The approval of Pombiliti + Opfolda, developed as a treatment for Pompe disease, has strengthened Amcius’ portfolio. The launch is underway and will likely boost sales growth in the coming years.
The company currently sports a Zacks Rank #1 (Strong Buy). FOLD shares have gained 12.1% in the past six months compared with the industry’s growth of 11.3%.
The Zacks Consensus Estimate for 2024 earnings per share (EPS) has increased 2 cents to 22 cents in the past 90 days.
Price and Consensus: FOLD
Exelixis’ lead drug, Cabometyx, continues to be the leading tyrosine kinase inhibitor for the treatment of renal cell carcinoma (RCC). The drug's use in combination with Opdivo in the first-line setting for RCC is driving demand.
The potential label expansion of the drug in additional indications should boost sales of the drug. The pipeline progress has been impressive as well, as Exelixis looks to expand its oncology portfolio beyond Cabometyx.
Exelixis currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for 2024 EPS has increased 44 cents to $1.83 in the past 90 days. Shares of the company have risen 20.3% year to date.
Price and Consensus: EXEL
Blueprint’s lead drug Ayvakit’s sales have witnessed strong uptake in the U.S. market. The drug was initially approved for treating gastrointestinal stromal tumors and its label has since been expanded to treat adult patients with advanced and indolent systemic mastocytosis in both the U.S. and EU markets. The label expansion of the drug has been boosting its sales. Other promising candidates in the pipeline are also progressing well.
Blueprint currently carries a Zacks Rank #2. The loss per share estimate for 2024 has narrowed to $1.26 from $2.03 in the past 90 days. Shares of the company have surged 92% in the past year.
Price and Consensus: BPMC
CRISPR Therapeutics is a leading gene editing company focused on developing CRISPR/Cas9-based therapeutics, which promise huge potential. The company received a major boost with the approval of a CRISPR-based gene therapy, Casgevy, for two blood disorders — sickle cell disease and thalassemia. The gene therapy has been developed in collaboration with Vertex Pharmaceuticals.
CRISPR currently carries a Zacks Rank #2. The loss per share estimate for 2024 has narrowed to $5.55 from $5.66 in the past 90 days. Shares of the company have risen 17.4% in the past year.
Price and Consensus: CRSP
Verona Pharma is focused on developing and commercializing innovative therapies for the treatment of chronic respiratory diseases. In June 2024, the company received a significant boost with the approval of Ohtuvayre (ensifentrine) for the maintenance treatment of chronic obstructive pulmonary disease (COPD) in adult patients. Ohtuvayre’s potential to relieve COPD symptoms and its bronchodilator and non-steroidal anti-inflammatory activity is expected to generate strong demand. An anticipated strong uptake of Ohtuvayre should fuel Verona’s growth prospects.
Price and Consensus: VRNA
VRNA carries a Zacks Rank #2 at present. The loss per share estimate for 2024 has remained stable at $2.07 in the past 60 days. Shares of the company have surged 76% in the year so far.
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