Biotech and life sciences stocks have had a great run-up so far in 2017. Through the end of October, the S&P Biotechnology Select Sector Industry Index (SPSIBI) is up 52%. That makes the life science stocks some of best performers around. And what’s not to like?
Many of the recent innovations in healthcare have come from biotech companies and with populations continuing to age, healthcare demand is soaring. That’ll put more money into biotech and life science stocks for the long-term.
But despite the long-term promise, the short-term hasn’t been so rosy. Biotech stocks and their science equipment sisters haven’t been that great in recent weeks. The sector has slide about 5% since the start of October.
For long-term investors, that’s just the “in” we’ve been waiting far.
Given biotech’s long-term future, investors should use the dip to load up on the sector. Here are seven ways to do that.
Life Science Stocks to Buy: Celgene Corporation (CELG)
Biotech stocks tend to naturally bounce around and are highly volatile. But usually that’s reserved for entry stage firms and not the sector’s elder statesmen. A 19% drop isn’t something that the big biotech stocks really ever experience. So Celgene Corporation’s (NASDAQ:CELG) dramatic drop on its earnings release is really shocking.
The bad news is that some of that drop is justified. CELG ended its clinical trials for developing a treatment for Crohn’s disease. At the same time, Celgene’s blockbuster blood-cancer drug Revlimid saw some weakness during its last reported quarter and management lowered its 2020 revenue guidance.
This caused momentum investors to abandon the life sciences stock in droves. But now, CELG can be had for a price-to-earnings ratio of just 11.9X, which is dirt cheap for a biotech stock.
For one thing, management’s revenue guidance was only down fractionally and it was still in the $19 to $20 billion range. That’s still an insane amount of money. Moreover, that’s for guidance three years away. A lot can happen over that time, including full approval for Celgene’s multiple sclerosis and ulcerative colitis drugs currently in trials. Meanwhile, drugs Pomalyst and Otezla are growing faster than expectations.
In the end, CELG could be one of the biggest bargains over the long haul. The current dip is a great opportunity for investors.
Life Science Stocks to Buy: Gilead Sciences, Inc. (GILD)
After a terrible 2016, biotech elder statesmen Gilead Sciences, Inc. (NASDAQ:GILD) is having a much better 2017. The stock is up more than 20% over the last three months.
GILD features a massively rich portfolio of blockbuster biotech drugs and it has been pretty successful at developing new ones. While sales of its hepatitis C suite of medications have seen sales slip, they still generate an enormous amount of cash for the firm. Perhaps more importantly, Gilead is moving past hep. C medications with a few strategic buyouts. The $12 billion it paid for Kite Pharma Inc (NASDAQ:KITE) will allow it to offer cell therapies to treat cancer. A market that could be worth $2 billion in annual sales when fully approved from the Food and Drug Administration.
And while investors wait for its efforts to bear fruit, GILD’s iron-clad balance sheet will protect them. The biotech firm had $41.4 billion of cash, cash equivalents and marketable securities on its books at the end of the last quarter. That huge balance sheet allows of GILD to do something most biotech stocks can only dream of. Namely, pay a dividend.
GILD currently yields a market beating 2.82%.
A stock with a big dividend and continued earnings growth behind it? I’ll take every share you have please. And so should you.
Life Science Stocks to Buy: Thermo Fisher Scientific Inc. (TMO)
During the gold rush, the real winners weren’t necessarily the people mining for gold, but the people supplying the picks, shovels and pans. In the case of the life science stocks, that has to be Thermo Fisher Scientific Inc. (NYSE:TMO). That doesn’t matter if it’s for government, university or biotechs, TMO supplies all the goods to make science work.
This includes everything from single-use PCR tubes all the way up to complex lab equipment. TMO’s catalog of products is vast and its brands command real leverage in the science community. And as a result, Thermo Fisher continues to rack-up rising sales, cash flows and of courses, profits.
Last quarter, it had sales of $5.1 billion alone.
But TMO could see a huge shot in the arm over the long-term. Its buyout of Patheon adds lab services to its resume. Patheon is one of the giants in the contract research organization space. Basically, biotech firms hire Patheon to run all the clinical trials, do bench work and other lab-related chores. Its a steadily growing industry.
With the buy, TMO will now be selling the picks and shovels as well as doing the digging. The kicker is it doesn’t matter if the firm finds gold — that’s still the biotech’s job. Thermo Fisher gets paid either way.
And with that, TMO is the ultimate life science stock for the long haul.
Life Science Stocks to Buy: SAGE Therapeutics Inc (SAGE)
Clinical stage biotech stocks are really lotto tickets that often hinge on one potential drug. SAGE Therapeutics Inc (NASDAQ:SAGE) is no different. The firm is resting its future on its super-refractory epilepticus drug candidate, brexanolone.
The problem is, late stage trials for brexanolone didn’t go very well. Naturally, SAGE is in the doghouse and it dropped more than 13% on the news.
But there is hope and there are potential profits on the horizon. Brexanolone has other potential uses, including treating postpartum depression. That use is quickly approaching late-stage trials and it is estimated to be doing much better in those trials.
For SAGE that could be a great reversal of fortunes and finally lead to a breakthrough for the company. Meanwhile, the firm has more than $243 million in cash on its balance sheet. That’s important as it indicates that there is still money in the kitty to keep lab work going.
Ultimately, SAGE looks like a great candidate for investors looking at clinical stage biotech stocks.
Life Science Stocks to Buy: Intercept Pharmaceuticals (ICPT)
Fear is holding back Intercept Pharmaceuticals Inc (NASDAQ:ICPT) in a big way. Last month, the U.S. Food and Drug Administration issued a warning that said ICPT’s Ocaliva medicine has the potential to increase the risk of liver injury and death if dosed incorrectly. The problem is that Ocaliva is Intercept’s only marketed drug.
The potential for deaths has some analysts spooked that the FDA will place a so-called black-box warning on Ocaliva. This means there is reasonable evidence of an association of a serious hazard with the drug. As a result, sales of the drug are expected to tank if that happens.
But here’s the thing: Ocaliva is used to treat a rare, chronic liver disease known as primary biliary cholangitis (PBC). Overtime, PBC causes your liver to shut down and you could need a transplant. This is pretty much a life or death kind of situation. For many patients, taking Ocaliva is pretty much a last-ditch effort anyway. And with that, sales shouldn’t drop off that much.
All the black box will do s cause medical professionals to think twice about the recommended dosage.
ICPT isn’t a slam dunk biotech stock, but it certainly has been beaten up unfairly in recent weeks. That could provide a decent short-term opportunity for investors.
Life Science Stocks to Buy: Alexandria Real Estate Equities Inc (ARE)
A real estate company seems out of place when looking at life science stocks, but Alexandria Real Estate Equities Inc (NYSE:ARE) is as “science” as they come. That’s because ARE focuses solely on renting lab space to research hospitals, biotech firms and the government scientific agencies.
The firm was the first to focus on labs. ARE’s portfolio spans plenty of research meccas, including Boston, San Francisco, New York and Maryland/Washington D.C. This cluster model has allowed ARE to be one of the premier property owners in exactly the right places.
It has also resulted in increasing rents, rising funds from operations and dividends for its shareholders. Since the recession, Alexandria has managed to raise its payout by over 145%. ARE stock currently yields a decent 2.76%.
For investors, the real estate investment trust (REIT) offers a unique take on biotech/life sciences theme. One that is potentially steadier than buying an early stage pharmaceutical.
Life Science Stocks to Buy: iShares Nasdaq Biotechnology Index (IBB)
Given the wide range of biotech and life sciences stocks, a broad approach may be best. For investors looking for a core biotech exchange-traded fund option, the iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB) is still the best game in town.
The $9.5 billion fund tracks all the biotechnology and pharmaceutical equities listed on the Nasdaq Composite — the dominant place where biotech stocks are found. This is currently around 160 different biotech stocks and it includes giants like GILD and Amgen, Inc. (NASDAQ:AMGN) as well as clinical stage firms like Merrimack Pharmaceuticals Inc (NASDAQ:MACK). IBB even includes many of the life sciences equipment and technology firms.
That broad scope has translated into pretty good returns. As of Sep. 30, IBB has managed to produce 15.12% annual returns over the last ten years. That’s enough to turn a $10,000 investment into more than $34,000.
Add in IBB’s low expense ratio of 0.47% — or $47 annually per $10,000 invested — and you have a recipe for life science stock success.
As of this writing, Aaron Levitt was long TMO and GILD stock.