If it were not for the surge in stock prices in the fourth quarter, biotechnology stocks would have ended the year in double-digit losses. Instead, most large-capitalization biotech stocks are around break-even in 2019. The market is signaling that it has bigger expectations for profit growth in the biotech sector driven by a number of positive catalysts.
At a macroeconomic level, markets now believe the government regulators will not scrutinize drug pricing. The government is starting to realize that high healthcare costs are not due solely to rising drug prices. So, biotech companies that raise prices to offset higher research and development costs may do so in 2020. Mega mergers in 2019, like AbbVie (NYSE:ABBV) buying Allergan (NYSE:AGN), signaled the undervaluation in the sector. In 2020, price-to-earnings valuations may expand to correct the market discount.
There are seven biotechnology stocks in 2020 that investors should hone in on. Get ready to pop these in your portfolio.
Biotech Stocks to Buy: Biogen (BIIB)
Biogen (NASDAQ:BIIB) rose from $220 to $300 in October when the company said it would resume filing for approval to bring its Alzheimer’s therapy drug to market. Then on Dec. 6, the company presented Phase 3 results for Aducanumab. Over an 18-month period, it enrolled 3,285 patients over the two studies. The results showed that with a high dose over a long period of time, there was a meaningful slowing of decline in Alzheimer’s patients. And so, if the drug passes regulatory review, BIIB stock will live up to its hype.
The Aducanumab data showed mixed results. Although a higher dosage benefited patients, the side effects on the higher dosage are not clear.
Biogen reported steady revenue growth in the third quarter. Revenue grew 5% to $3.6 billion as earnings per share grew 17% to $8.39 (on a GAAP basis). Its multiple sclerosis drug portfolio is resilient. But Biogen is focused on addressing the intellectual property challenge with Tecfidera, a drug that treats relapsing forms of MS. This is offset by the launch of Vumerity, a drug also used to treat people with relapsing forms of MS.
Biogen reported revenue for Spinraza growing in the double-digits year-over-year and quarter-over-quarter. This drug treats patients with spinal muscular atrophy (SMA). Since Spinraza has a well-characterized safety profile, Biogen will run a further studies to evaluate the benefits of higher doses to achieve greater efficacy.
Analysts who offer a price target on BIIB stock have an average of a $306.75 price target.
Trading at 52-week highs, Amgen (NASDAQ:AMGN) trades with analyst price targets that average $246. But at a trailing P/E of 18.6 times, the company’s Otezla acquisition from Celgene (NASDAQ:CELG) is accretive to full-year results.
Amgen raised its earnings guidance for fiscal 2019 after it completed the acquisition of Celgene’s psoriasis drug, Otezla. It now expects EPS of $14.50-$14.70 in FY 2019. Analysts had expected $14.45 in EPS. Amgen paid $13.4 billion for Otezla.
Just over a month ago, Amgen announced a collaboration with BeiGene (NASDAQ:BGNE). Forming collaborations are in Amgen’s growth strategy. Since 2011, it grew by expanding to 100 countries, including China and other emerging markets. BeiGene, which represents a strategic investment in China, offers strong oncology expertise. It also has good commercial and clinical capabilities.
In 2020 and beyond, the Amgen-BeiGene collaboration may accelerate the commercialization of Amgen’s approved oncology products in the region. It paid $2.7 billion for a 20.5% equity stake, which was a 36% premium to BeiGene’s 30-day average share price.
In Q3, Amgen reported EPS of $3.66. Revenue declined 2.9% to $5.7 billion. Despite a global sales decline, Amgen reported double-digit sales for a multitude of drugs. If generic competition lessens in 2020 and drug pricing improves, Amgen stock could continue trending higher.
Gilead Sciences (GILD)
Gilead Sciences (NASDAQ:GILD) is stuck in a wide trading range. And as investors wait for the stock to build an uptrend, they may collect a dividend that yields around 3.8%.
In the third quarter, the company reported revenue of $5.6 billion, unchanged from last year. Non-GAAP EPS was $1.75. Total HIV product sales reached a record, with quarterly revenue of $4.2 billion. In the quarter, the U.S. approved Gilead’s Descovy for PrEP (pre-exposure prophylaxis). This drug is indicated to reduce the risk of sexually acquired HIV-1. Filgotinib was validated in the European Union and the company submitted a new drug application in Japan. Filgotinib is a JAK1 inhibitor that treats rheumatoid arthritis. If approved, it will compete with AbbVie’s (NYSE:ABBV) Humira.
Investors should consider Gilead for 2020 because of its strong cash flow generation. It produced $2.6 billion in cash from operations in the third quarter and now has $25.1 billion in cash and investments. That healthy cash flow allowed the company to easily spend on R&D. It paid $5.5 billion for global research collaboration activities and it also invested in Galapagos (NASDAQ:GLPG). Galapagos gives Gilead access to many compounds, including six molecules that are in clinical trials. For example, Gilead gains rights to a Phase 3 candidate that treats idiopathic pulmonary fibrosis. GLPG1972 is a Phase 2b candidate that treats osteoarthritis.
Gilead could grow its revenue beyond the 12.7% rate. If its purchase of Kite Pharmaceuticals yields new products brought to market, the stock is set to blast off in late 2020 and beyond.
Regeneron Pharmaceuticals (REGN)
Regeneron (NASDAQ:REGN), which is getting better known for its blockbuster drug Dupixent, broke out of a downtrend in October. Investors correctly bet that it would report a strong quarter. And it did just that on Nov. 5.
The company reported an EPS of $6.67 as revenue soared 23.1% year-over-year to $2.1 billion. Markets incorrectly worried over generic pressure on Eylea, which treats advanced wet age-related macular degeneration. Eylea sales grew 14% to $1.9 billion. Dupixent sales continued to exceed estimates. Sales of the drug, which treats patients suffering from Type 2 inflammatory diseases, was annualized at over $2.5 billion in Q3. The drug treats not only atopic dermatitis, but also asthma and chronic rhinosinusitis with nasal polyps.
Dupixent has a growing addressable market. As it gains approvals worldwide, sales might even accelerate. In 2020, Regeneron will continue investing in researching activities for the drug to have additional indications. For example, late next year it will have data in combination with Aimmune’s (NASDAQ:AIMT) AR101 for treating peanut allergies. It will also have a data readout for its interleukin-33 (IL-33) antibody called Regeneron 3500 for treating atopic dermatitis and COPD (chronic obstructive pulmonary disease).
Regeneron continues to develop drugs in the oncology market. It launched Libtayo, an anti-PD-1 therapy that treats cutaneous squamous cell carcinoma. It also has new data from Libtayo in treating lung cancer.
At a P/E near 20 times, Regeneron still has plenty of upside potential. Even if the company’s revenue were to slow to the 4% range in the next five years, the stock is still worth around $526.
Crispr Therapeutics (CRSP)
Crispr Therapeutics (NASDAQ:CRSP), which is based in Switzerland, almost doubled in 2019. So after that performance, why should investors expect any more upside in 2020?
CRSP reported encouraging results for a potential immune-evasive cell replacement therapy for diabetes. From its press release, it said: “The data demonstrate that the CyT49 pluripotent stem cell line, which has been shown to be amenable to efficient scaling and differentiation, can be successfully edited with CRISPR.”
The results are further proof that regenerative medicine and gene editing may lead to cures in various diseases. Crispr is currently focusing on chronic diseases like diabetes.
Optimism for CRSP stock is so strong that a 4.3 million stock offering at $64.50 barely hurt the stock. The stock sale will add $274.1 million of cash, which Crispr may use to fund its ongoing clinical studies in sickle cell disease and beta-thalassemia.
Digging into the details, Crispr said that it successfully treated its first patient in the CLIMB SCD-121 study. The neutrophil engraftment had 46.6% hemoglobin F four months later. That suggests a curative response. Since the study is ongoing, the company will continue to inform investors of the safety profile of the treatment and its efficacy.
Crispr is ushering in an innovative form of therapy through gene editing. And markets like what the future holds.
Editas Medicine (EDIT)
Editas Medicine (NASDAQ:EDIT) has negligible revenue and is losing money. But its collaboration with Celgene gives it the resources in advancing its pipeline.
Editas reported a $70 million payment from its Celgene collaboration. This payment is in recognition of the work it did so far. It also includes contributions it will make to the collaboration. Its first patient will receive a doss of EDIT-101 by early 2020. This medicine treats subjects suffering from LCA10 or Leber congenital amaurosis. In Q3, Editas presented data for its USH2A study. It produced up to 60% corrected gene expression.
Editas added $15 million in its cash levels in Q3 and had $333 million as of Sept. 30, 2019. And since it used $29 million for operating expenses and capital expenditures, a cash raise is unlikely in the short term. Looking ahead, additional collaborations with Celgene could give EDIT stock a lift. On its conference call, the company said:
“All of that work is rolled into the new collaboration with Celgene. As you can imagine, as a leader — and we believe the leader in T cell medicines for oncology including arguably the best CD19 and the best BCMA CAR-T programs that have a strong interest in maintaining their leadership position and gene editing is certainly an important part of what are likely to be the next generation of T cell medicines for oncology.”
Editas’ collaboration with Celgene continues to progress nicely. Wall Street, which has a $42.50 price target, is also optimistic that the company will reward investors in 2020.
Innoviva (NASDAQ:INVA) fell to as low as $10.03 recently but bounced back in the last month after reporting a strong Q3. The company earned 36 cents a share, while revenue grew 6.6% year-over-year to $65.8 million.
Innoviva booked $69.2 million in gross royalty revenues from GlaxoSmithKline (NYSE:GSK). This included royalties of $46.4 million connected to sales of Relvar/Breo Ellipta. This drug is a combination inhaled corticosteroid that treats patients with COPD (chronic obstructive pulmonary disease). Anoro Ellipta, which treats COPD and is taken once daily, brought in royalties of $11.6 million.
Q3 operating costs rose only slightly to $5 million, up from $4 million last year. The company had $2.8 million in legal and related fees. Theravance Biopharma (NASDAQ:TBPH) initiated an arbitration. In the final decision, the Theravance Respiratory Company would reimburse those legal costs.
Innoviva ended the third quarter with $297.2 million in cash and cash equivalents.
Global Relvar/Breo Ellipta sales fell 10% globally and by 32% in the U.S. Pricing discounts hurt revenue, and that revenue was partially offset by volume growth. Market share gains in various European markets and in Japan offset the overall revenue declines. Anoro Ellipta net sales grew 18% globally and were up 17% in the U.S. The negative impact of higher rebates was offset by higher sales volumes.
For 2020, Innoviva has a lower operating cost basis, helped by ending its Brisbane office lease. So, if the company reduces rebate offers and continues to grow its sales volume, revenue and profits may rebound.
As of this writing, Chris Lau held shares of INVA.