3 Biotech Stocks That Belong in Your Portfolio

by Susan J. Aluise | July 14, 2014 9:45 am

3 Biotech Stocks That Belong in Your Portfolio

The recent market selloff has been brutal for investors in biotech stocks, as many have been spooked by record highs, disappointing news on patent protection and some clinical trials.

biotech laboratory scientist 630 ISP 300x227 3 Biotech Stocks That Belong in Your Portfolio[1]
Source: ©iStock.com/AlexRaths

Nevertheless, the pullback in biotech stocks is an opportunity for growth-oriented investors to buy into this dynamic sector.

First the bad news: the U.S. Patent and Trademark has proposed new rules that bar companies from gaining patent protection on drugs derived from nature, such as pieces of genes or antibodies, according to Scientific American. Comments about the proposed rules are due by July 31.

So what’s the good news? The biotech industry not only is fueling development of blockbuster treatments for tough to manage diseases, but investors in companies with strong drug pipelines can deliver very large returns when they get the green light from regulators. Still, biotech stocks — even many large caps — can be volatile, so investors need to be comfortable taking on more risk in exchange for those high-potential returns.

That said, these larger-cap biotech stocks are a little more manageable from a risk perspective, and belong in your portfolio now:

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Biotech Stocks to Buy – Amgen (AMGN)

Amgen 185 3 Biotech Stocks That Belong in Your Portfolio[2]In a biotech sector heavily populated with small and micro-cap stocks, Amgen (AMGN[3]) is a large-cap pure play. AMGN has made mergers and acquisitions a priority, most notably with last year’s $10 billion purchase of Onyx Pharmaceuticals and its cancer drugs.

From a drug pipeline perspective, the FDA earlier this month gave AMGN’s blinatumomab a Breakthrough Therapy Designation based on results of a Phase II clinical trial. Blinatumomab is an antibody that helps the human immune system detect and kill cancer cells for certain types of leukemia and lymphoma.

The company’s spinout of Atara Biotherapeutics is considering a $50 million IPO, according to the San Francisco Business Times. AMGN had been working with Bind Therapeutics (BIND[4]) to develop targeted cancer therapies on BIND’s nanotechnology platform, but the companies broke off the deal last week.

Amgen’s shares have slipped 6% since mid-March, but are climbing again. Meanwhile, AMGN stock is trading at less than 14 times forward earnings, it has nearly $4 billion in levered-free cash and pays a current dividend yield of 2%.

While risk is always a concern with biotech stocks, AMGN is less volatile and a much more stable play than many other biotech stocks.

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Biotech Stocks to Buy – Gilead Sciences (GILD)

Gilead185 3 Biotech Stocks That Belong in Your Portfolio[5]Gilead Sciences (GILD[6]) is another large-cap pure play, with a market cap of more than $136 billion.

Wall Street is looking for good news when GILD reports quarterly earnings on July 23; for instance, UBS analyst Matthew Roden recently raised his sales expectations.

Innovative virus treatments have been Gilead’s bread and butter, ranging from its development of Tamiflu in the late 1990s to blockbuster HIV and Hepatitis C drugs. Although GILD faces pricing headwinds from its blockbuster Hep C drug, Sovaldi, short-term jitters about the high cost of the orally delivered treatment are likely to fade given the high cure rate. Gilead also still has blockbuster HIV drugs like Stribild and Truvada.

GILD shares fell by more than 20% between late March and mid-April, but the stock has been trending higher since then. GILD’s fundamentals are intriguing: The stock trades at only 11 times forward earnings and has a price/earnings-to-growth rate of 0.46, indicating that the stock still could be undervalued.

GILD also has a lot of cash on its balance sheet — always a good thing for biotech stocks.

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Biotech Stocks to Buy – Celgene (CELG)

Celgene185 3 Biotech Stocks That Belong in Your Portfolio[7]Celgene (CELG[8]) is a large-cap stock with a robust drug pipeline and significant strength. Last month, the company approved a 2-for-1 stock split and doubled its existing share repurchase authorization to $1.15 billion, from the prior $575 million.

But headwinds include a patent dispute over Celgene’s flagship blood-cancer treatment Revlimid — a blockbuster drug that generated nearly $4.3 billion in sales last year — more than 60% of the company’s revenues. Word on Natco’s bid to challenge CELG’s patent and market a generic version of the drug could be decided later this month.

On the clinical trial front, phase III trials of Celgene’s psoriasis drug Otezla were disappointing in treating a severe form of spinal arthritis. The great news: CELG has a deep and diverse drug pipeline and the company is committed to taking care of its shareholders — last month’s 2-for-1 stock split was the fourth in 14 years.

CELG stock took a beating in the first four months of the year, falling by 20% through mid-April. Since then, however, CELG stock has gained nearly 28% and gotten back into the black for the year-to-date. Yet Celgene shares still sport a PEG ratio of just 0.8, which indicates a little bit of value.

Investors should keep an eye on the progress of the Revlimid case, but apart from a negative outcome, CELG should be poised to move higher this year.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.

Endnotes:
  1. [Image]: http://investorplace.com/wp-content/uploads/2014/06/biotech-laboratory-scientist-630-ISP.jpg
  2. [Image]: http://investorplace.com/wp-content/uploads/2013/08/Amgen-185.jpg
  3. AMGN: /stock-quotes/AMGN-stock-quote/
  4. BIND: /stock-quotes/BIND-stock-quote/
  5. [Image]: http://investorplace.com/wp-content/uploads/2012/09/Gilead185.jpg
  6. GILD: /stock-quotes/GILD-stock-quote/
  7. [Image]: http://investorplace.com/wp-content/uploads/2013/03/Celgene185.jpg
  8. CELG: /stock-quotes/CELG-stock-quote/

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