It has been a choppy ride for the biotech industry in 2023 in an uncertain macroeconomic environment. Nevertheless, the economic scenario does look upbeat from here as interest rates aren’t expected to be increased further for the time being. Most companies in the biotech sector posted decent third-quarter results. Moreover, the outlook provided by the companies indicates bright prospects driven by new drug approvals and positive pipeline updates. With the pandemic behind us, it is regular business. Biotech companies are now looking to bolster their product portfolios and pipelines through collaborations and buyouts. Hence, M&A is back in the spotlight. Given the continuous need for innovative medical treatments, irrespective of the state of the economy, the biotech industry can be a haven despite the inherent volatility and uncertain macroeconomic environment.
Biotech companies like Gilead Sciences, Inc. GILD, CRISPR Therapeutics AG CRSP, ACADIA Pharmaceuticals Inc. ACAD, Dynavax DVAX and Ligand Pharmaceuticals Incorporated LGND are 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 as 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 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 spend millions and billions to create a drug with path-breaking technology, which results in 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 is because leading pharma/biotech companies look to diversify their revenue base in the face of dwindling sales of high-profile drugs. After a lull of almost two years, pharma and pharma/biotech bigwigs are now looking to bolster their portfolios. The influx of cash from big pharma further propels the biotech sector. Bristol Myers recently announced that it would acquire oncology-focused company Mirati Therapeutics for a total equity value of $4.8 billion-plus contingent value right of approximately $1.0 billion. Earlier, Novartis acquired Chinook Therapeutics. Biogen acquired Reata Pharmaceuticals, Inc. While oncology and immuno-oncology are the key focus areas, treatments for obesity, rare diseases and gene-editing companies also hold potential, 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: With the pandemic creating havoc and the focus mostly on coronavirus treatments in the last three years, the industry saw a slowdown in new drug approvals for other diseases apart from COVID-19 treatments. Nevertheless, with increasing R&D spend in 2023 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, 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 #43, which places it among the top 17% of more than 251 Zacks industries. The rank mirrors 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 469-stock group within the broader Zacks Medical sector. It has underperformed the S&P 500 composite and the Zacks Medical sector year to date.
The stocks in this industry have declined 22.9% compared with the Zacks Medical sector decline of 9.7%. The S&P 500 composite has risen 19.3% 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 2.16X compared with the S&P 500’s 3.82 and the Zacks Medical sector's 2.91.
Over the last five years, the industry has traded as high as 3.51X, as low as 1.85X and at a median of 2.64X, as the chart below shows.
Price/Sales TTM
5 Biotech Stocks Worth Buying
Ligand’s business model creates value for stockholders by developing or acquiring royalty revenue-generating assets 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 company has forged collaborations with leading pharma/biotechs like Amgen, Merck and Gilead among others. The spin-off of its OmniAb business into a separate entity should accelerate growth. Concurrent with the third-quarter results, the company increased its sales and earnings guidance for 2023.
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 2023 earnings per share has increased 12 cents to $5.10 in the past 60 days. Earnings estimates for 2024 have jumped from $4.26 per share to $4.59 in the same timeframe.
Price and Consensus: LGND
Gilead Sciences is a pioneer in developing drugs for the treatment of human immunodeficiency virus (HIV) and oncology diseases. Its HIV treatment, Biktarvy, has become the number one prescribed regimen for both treatment-naïve and switch patients. Gilead is looking to expand beyond antivirals into the lucrative oncology market. Cell therapies like Yescrata and Tecartus are showing strong momentum and should drive further growth on label expansions.
Gilead’s acquisition of an oncology company added Trodelvy (sacituzumabgovitecan-hziy), a first-in-class antibody-drug conjugate, to its portfolio. The addition of Trodelvy has accelerated the company’s efforts to develop a strong and diverse oncology portfolio and reduced dependence on its virology business. Trodvely has put up a robust performance and boosted the top line.
Earnings estimates for 2023 have risen by 9 cents in the past 30 days to $6.74 and by 6 cents to $7.44 for 2024. Gilead currently carries a Zacks Rank #2 (Buy).
Price and Consensus: GILD
CRISPR Therapeutics is a leading gene editing company focused on developing CRISPR/Cas9-based therapeutics, which promise huge potential. Its lead product candidate, exa-cel, is being developed in partnership with Vertex Pharmaceuticals. The U.K. Medicines and Healthcare products Regulatory Agency recently granted conditional marketing authorization to exa-cel for the treatment of sickle cell disease (SCD) and transfusion-dependent beta-thalassemia (TDT) under the brand name Casgevy.
The companies have completed the biologics license application submissions with the FDA for exa-cel in SCD and TDT indications, and a final decision is expected by Dec 8, 2023 and Mar 30, 2024, respectively. A potential approval will be a significant boost for CRSP.
CRSP has had a phenomenal run, with shares surging 66.2% year to date. Loss estimates for 2023 have narrowed by $1.22 in the past 30 days to $3.44 and by 93 cents to $5.51 for 2024. CRSP currently carries a Zacks Rank #2.
Price and Consensus: CRSP
Acadia is focused on developing innovative medicines to address unmet medical needs in central nervous system disorders. Lead drug Nuplazid (pimavanserin) is the first and the only FDA-approved treatment for hallucinations and delusions associated with Parkinson’s disease psychosis. Several additional studies on Nuplazid, targeting different types of neurological and psychiatric disorders, are presently ongoing. Sales of the drug have witnessed a steady increase and label expansions of the drug will boost uptake further. The approval of Daybue has diversified the portfolio and will reduce the burden on Nuplazid.
Loss estimates for 2023 have narrowed to 34 cents from 41 cents for 2023 while the earnings estimate for 2024 currently stands at 90 cents per share. The company currently has a Zacks Rank #2. ACADIA shares have gained 41% so far this year.
Price and Consensus: ACAD
Dynavax, a commercial-stage biopharmaceutical company, is developing and commercializing innovative vaccines against infectious diseases. It has two commercial products, HEPLISAV-B vaccine (Hepatitis B Vaccine [Recombinant], Adjuvanted), which is approved in the United States and the European Union for the prevention of infection caused by all known subtypes of hepatitis B virus in adults 18 years of age and older, and CpG 1018 adjuvant, currently used in multiple adjuvanted COVID-19 vaccines. HEPLISAV-B continued to maintain a strong market share and the company is also working to expand its label.
Dynavax is also advancing CpG 1018 adjuvant as a premier vaccine adjuvant with adjuvanted vaccine clinical programs for shingles and Tdap. The company has also formed global research collaborations and partnerships focused on adjuvanted vaccines for COVID-19, seasonal influenza, universal influenza and plague.
Price and Consensus: DVAX
Loss estimates for 2023 have narrowed to 12 cents from 23 cents for 2023 in the past 60 days, while the earnings estimate for 2024 currently stands at 18 cents per share. The company currently has a Zacks Rank #2. Shares of DVAX have gained 27.2% year to date.
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