Biotech stocks delivered big this year for investors pursuing an aggressive growth strategy, driven by exciting new treatments for dread diseases like cancer, multiple sclerosis, hepatitis and HIV. The good news: despite the fact that biotech stocks delivered jaw-dropping performance this year, opportunities to play this burgeoning sector continue to abound — and some investments are poised to continue their strong run into 2015.
First a quick primer: biotech companies develop treatments from living organisms like viruses, bacteria, DNA or other molecules. The yardstick for biotech stock performance is the Nasdaq Biotechnology Index (NBI), which covers 119 stocks in the sector and has gained 38% year-to-date. That kind of performance easily pulls the focus of investors.
The bad news: Biotech stocks can be riskier than equities in most other sectors due to high development costs and significant risks. Biotechs with drugs in the early stage of testing tend to be most vulnerable. But when it comes to treatments that successfully complete late-stage testing, only four out of every 10 new biotech drugs will receive regulatory approval.
Although biotech stocks often are riskier than the broader market, they can deliver aggressive growth. Investors who want exposure to the sector, but have a shorter investment horizon or a lower tolerance for risk also have solid options.
Here are three ways investors can play the biotech bounce:
Play the Bounce in Biotech Stocks: Merck & Co., Inc. (MRK)
Type: Big Pharma
YTD Performance: 20%
For conservative investors who want income and exposure to the biotech sector, but shy away from the inherent volatility in many biotech pure-plays, Merck & Co., Inc. (MRK) is a Big Pharma giant that is targeting promising biotech acquisitions to bolster its performance.
Merck on Monday announced a deal to buy Cubist Pharmaceuticals (CBST) for $9.5 billion — the deal would strengthen Merck’s position in treatments for so-called “superbugs” — infections that are resistant to most available drugs. CBST’s antibiotics — including Cubicin and Zerbaxa — will add to Merck’s growing antibiotics pipeline and follows last year’s acquisitions of Trius Therapeutics and Optimer Pharmaceuticals.
Patent challenges to Cubist’s drugs left some MRK stock holders questioning whether the pharma giant overpaid for CBST. However, Merck is staking a claim in fighting superbugs — as its recent agreement with NewLink Pharmaceuticals on an Ebola vaccine illustrates.
MRK stock should continue to bank on positive clinical trial data — as well as mergers and acquisitions — to drive growth in 2015.
Play the Bounce in Biotech Stocks: Gilead Sciences, Inc. (GILD)
Type: Large-cap biotech
YTD Performance: 41%
Soaring on the wings of its blockbuster Hepatitis C drug Sovaldi, Gilead Sciences, Inc. (GILD) has been on a tear this year. But GILD is no one-hit wonder, betting the farm on its $84,000 a year Hep C treatment. Gilead has continued to expand and refine is HIV and Hepatitis C drug portfolio, which includes a single-tablet oral combination of ledipasvir and sofosbuvir to further advance its treatment options.
One of its most promising drug programs is the antiretroviral drug tenofovir alafenamide (TAF) for the treatment of HIV. Earlier this month, Mylan (MYL) announced an agreement with GILD for non-exclusive rights to manufacture and distribute TAF — either alone or in combination with other drugs — in 112 countries.
Although GILD stock has been on a tear this year, its valuation remains very attractive: It has a puny price/earnings-to-growth ratio of 0.54 and trades at only 10.5 times forward earnings.
Play the Bounce in Biotech Stocks: PTC Therapeutics, Inc. (PTCT)
Type: Small-cap biotech
YTD Performance: 223%
If your priority is aggressive growth and you don’t mind a little extra risk, small-cap biotech stocks like PTC Therapeutics, Inc. (PTCT) can deliver huge returns. The focus of PTC Therapeutics’ explosive growth is its muscular dystrophy drug Translarna, which recently gained received approval in Europe. PTCT’s focus is on the development of orally administered, small molecule drugs to treat rare disorders. The drug pipeline is promising — particularly treatments for so-called “orphan” genetic disorders.
As is the case with most thinly traded small-cap biotech stocks, PTCT is not for the faint of heart or light of wallet. For its most recent quarter, PTCT reported a loss of $27.3 million (93 cents a share), which missed Wall Street’s earnings expectations by 2 cents a share.
Despite the fact that PTCT stock has gained more than 40% in the past month alone, Credit Suisse opined in a recent research note that the stock could double in 2015. Analysts also are optimistic about enrollment in Phase 3 trials of the drug, results of which are expected in October 2015.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.
