by Susan J. Aluise | March 21, 2014 1:28 pm
Biotech stocks’ performance blew the doors off the market over the past year as promising treatments advanced and trial results inspired new confidence.
Indeed, for growth-focused investors looking for “the next big thing,” you want to invest in biotech stocks developing drugs and treatments from living organisms like viruses, bacteria, DNA or other molecules. Treatments for things such as cancer, multiple sclerosis, diabetes, hepatitis and HIV are a launching pad for enormous revenues for years on end.
Still, risk and reward go hand in hand — only 40% of drugs that reach even the final stage of FDA testing actually get approval, and the odds are far worse for those in earlier stages. That means every little headline has a big impact, and so biotech stocks tend to be more volatile than the broader market. Plus, when you factor in hefty up-front development costs, most biotech companies take a long time to turn a profit — but if/when they do, it can pay off handsomely.
Given the sheer profit potential of this sector, all investors should have some exposure to biotech stocks, but your investment horizon and risk tolerance is almost certainly going to differ from the next guy. So, if you’re looking for ideas of biotech stocks to buy, here are a few suggestions — some for conservative investors, and some for the truly adventurous:
Type: Small-cap stock
Market Cap: $972 million
Novavax (NVAX) is a clinical-stage biopharma firm that creates vaccines and vaccine adjuvants to protect against infectious diseases like influenza. The company has developed a proprietary approach that uses “recombinant protein nanoparticles” to customize vaccines that can protect against new or mutant infectious disease strains.
If a new strain of the flu appears, NVAX’s approach can strip off the surface proteins of the virus or pathogen to trigger an immune response without exposing patients to the virus. Last month, the U.S. Health and Human Services Department extended its contract with NVAX, which funds the upcoming Phase II trial for the company’s H7N9 avian flu vaccine.
The company also is working on vaccines for respiratory syncytial virus (RSV), a common cause of lower respiratory tract infections in children.
NVAX, which reported fourth-quarter earnings last week, lost 7 cents a share, beating the Street by a penny. Revenue skyrocketed 89% year over year to $8.7 million.
The Takeaway: NVAX shares have gained 150% in the past year and the company is well positioned with a promising proprietary technology — demand for these vaccines will be global. As a small-cap biotech stock with a fairly focused pipeline, risk and volatility are part of the equation — and profits will not come quickly. This stock is best suited for investors who are looking for aggressive growth, have a longer investment horizon and have a higher-than-average tolerance for risk.
Type: Large-cap stock
Market Cap: $113 billion
Gilead Sciences (GILD) built its reputation on its HIV drug franchise, racking up some $9 billion in sales for drugs like the four-in-one Stribild, as well as Truvada. The company also is successfully expanding beyond its core HIV drug portfolio into Hepatitis C with Sovaldi and Idelalisib, which combats non-Hodgkin’s lymphoma. The orally administered Sovaldi, with its reported cure rates near 90% in clinical trials, has the potential to be a blockbuster drug for GILD.
A couple of headwinds have emerged recently, however: Idenix Pharmaceuticals (IDIX) filed a patent infringement lawsuit against Gilead over Sovaldi; insurers — particularly those that administer Medicaid — are crying foul at Sovaldi’s hefty price tag: $84,000 for a 12-week course of the drug. Unlike many biopharmaceutical treatments that are geared toward rare conditions, the Hepatitis C market is huge globally, raising the possibility that Sovaldi could be one of the most profitable new drug launches in history.
The Takeaway: Although GILD shares have soared 70% in the past year, it’s still trading at just 14 times forward earnings and a price/earnings-to-growth ratio of 0.55, indicating it’s still undervalued. Better still, at a beta of 0.9, it’s less volatile than your typical biotech. If you’re looking for a large cap value stock in the biotech sector that combines size and relative stability with growth, there could be a place for GILD in your portfolio.
Assets Under Management: $5.8 billion
If you’re looking for size, diversification and a long track record in the biotech sector, the iShares Nasdaq Biotechnology Index Fund (IBB) could be a good choice. IBB has been around since 2001 and has a whopping $5.8 billion in assets under management. This ETF invests primarily in large, growth companies that engage in biomedical research and development of drugs or other treatments for medical conditions.
IBB’s top five holdings — which currently comprise about 36% of its total assets — are Biogen (BIIB), Gilead Sciences (GILD), Amgen (AMGN), Regeneron Pharmaceuticals (REGN) and Celgene (CELG). It’s also a fairly cheap way to invest in biotech stocks, with expenses just running 0.48% for exposure to IBB has gained 65% over the past year and its expense ratio is on par with the rest of the sector at 0.48.
The Takeaway: Conservative investors looking to gain exposure to the biotech sector could find IBB a good bet for several reasons. ETFs have the built-in advantage of diversification. ETFs trade over a major exchange just like equities, and expenses tend to be lower than those of actively traded mutual funds. In this case, expenses are just 0.48%, or $48 annually for every $10,000 invested, to gain access to 122 stocks in one easy bundle.
Type: Mutual Fund
Assets Under Management: $653.8 million
If you’re an aggressive growth investor looking for diversification, your risk tolerance is high and you have a relatively long investment horizon, BIPSX might be a mutual fund to consider.
This mutual fund is a so-called trading-leveraged equity fund, meaning that in addition to investing in the stock of companies in the sector, it also uses a mix of derivatives such as options, futures and swaps to increase the daily performance of the underlying index. In this case, BIPSX aims to deliver daily returns that are 150% of the Dow Jones U.S. Biotechnology Index.
Four of the fund’s top five holdings are the same as IBB — it has AbbVie (ABBV) instead of REGN — but the top five account for more than 42% of BIPSX’s holdings.
Two of ProFunds’ top advisers — Charles Lowery and Michael Neches — took over managing the fund last October.
The Takeaway: While using leverage is a great way to further improve eye-popping returns in the biotech space, investors need to be aware of the potential pitfalls. Namely, sure, you could juice your returns … but you also can amplify your losses. Also, unlike stocks or ETFs, mutual funds can’t be traded during the day (though most longer-term investors needn’t worry about this). It’s also expensive, at 2.09% in fees, and requires a minimum investment of $15,000.
Still, if you’re fine with risk and want to really put the pedal down on the broader sector, BIPSX can get the job done.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.
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