The only thing more important than what to buy is what not to buy. While the S&P 500 had a big year in 2019 that has rolled into 2020, the same can’t be said of biotech stocks or the biotech industry more broadly.
The industry wasn’t down, but its 9% return in the past 12 months isn’t exactly burning up the track.
There are some great opportunities in biotech to be sure. There are breakthrough technologies that are starting to hit the markets after decades in the research and development stages.
We’re seeing new drugs in immuno-oncology, gene therapy and genetic coding that may well be game changers.
But that doesn’t mean that every company that is in these hot sectors is worth your money. As always, you need to be very selective with these companies — both the big names and the smaller ones.
The seven biotechs to avoid have set off alarms in my Portfolio Grader. While they many not be bad companies, they aren’t where you want to have your money in this sector right now. In fact, considering the broader market woes stemming from coronavirus fears, very few sectors are safe right now.
Biotech Stocks to Avoid: Bluebird Bio (BLUE)
Bluebird bio (NASDAQ:BLUE) is a mid-cap stock ($5 billion) that’s a clinical stage biotech. That basically means it has drugs that are either heading to market or are already in the market.
In BLUE’s case it has recently launched one of its drugs, Zynteglo, into the European Union. Last year it had to delay the launch because of manufacturing issues. It’s a gene therapy drug used to treat a rare blood disorder called beta thalassemia.
Of course that kind of news hammered the stock. But it’s one of the few gene therapy drugs through clinical trials. It also has a drug in the pipeline for multiple myeloma that is doing well in trials.
In the past 12 months, the stock is off 30%. That makes it somewhat attractive to bottom fishers hoping to play its upside as drugs are released. But it also puts it in a precarious position and there are no drug approvals in the U.S. yet, where the big money on drugs is.
Gilead Sciences (GILD)
Gilead Sciences (NASDAQ:GILD) is one of the top players in the biotech space, sporting an $80 billion market cap.
It has a strong line-up when it comes HIV/AIDs and Hepatitis C drugs. But the latter market has plenty of competition now and the former is also seeing some new competition. That means price wars and having to share more of the pie with competitors.
GILD has made some moves to show it’s still a formidable force, like acquiring some promising biotechs. But it doesn’t have the kind of momentum it did and it hasn’t really defined its new vision.
The stock is down almost 8% in the past year, but it hasn’t done much for many years now, especially in such a dynamic space with the leadership position it has. A nearly 4% dividend is tempting, but this sector is about growth.
For what it’s worth, what you can’t find with Gilead you can find in what I call “bulletproof stocks.” Strong, reliable dividend payments and trustworthy growth!
FibroGen Inc (FGEN)
FibroGen Inc (NASDAQ:FGEN) is another mid-cap biotech that has been around since the early 1990s. It has two drugs that are in clinical trials in the U.S., Europe and China.
Its drug Roxadustat is already approved and marketed in China and Japan for anemia and chronic kidney disease (CKD). It’s in late stage trials in Europe and the U.S. as well.
Pamrevlumab is a monoclonal antibody that limits connective tissue growth. This drug is in phase 2 and phase 3 trials for various conditions and has been recognized for Orphan Drug status as well as Fast Track status for some those uses. This helps commercialize these drugs faster than normal.
Again, these are promising drugs. And having them in the market is a big deal. But the U.S. is the market where the margins are. And what passes muster in other countries, doesn’t get it through the U.S. Food and Drug Administration any quicker.
What’s more, given the cost of getting approvals, FGEN is straddling a debt vs revenue fence right now.
Nektar Therapeutics (NKTR)
Nektar Therapeutics (NASDAQ:NKTR) has been around since 1990 and has had quite a ride over that time.
One of the chief long-term gripes about this mid-cap stock ($3.8 billion), is that its science is good but its management doesn’t always manage growth well. Whether that’s partnership deals, royalty deals, portfolio and pipeline management, it has held the company back when it could have expanded.
Here’s a classic example of its one step forward, one step back troubles. In early January it inked a new deal for cancer drug pipeline with Bristol Myers Squibb (NYSE:BMY). The following week, two FDA advisory committees rejected its newest opioid painkiller oxycodegol.
Right now, NKTR has two drugs in the market that are marketed by Astra Zeneca (NYSE:AZN) and Baxalta. The first is movantik, a drug for opioid-induced constipation. The second is Adynovate for hemophilia.
Aside from that pair, it has 16 drugs in U.S. trials at various stages. Many it has similar partnerships with major pharmaceutical companies once the drugs are approved.
I suggest investors stick to the criteria I’ve laid out in my guide to buying bulletproof stocks. These are simple, easy-to-follow rules for investing in big growth:
- Proven dividend growth
- History of consistent payouts
- Sustainable payout ratio
- Above-average yield
- Market-crushing sales and earnings growth
If you use this as your checklist, you can’t go wrong! I’ve personally amassed a small fortune by following these simple steps.
Regeneron Pharmaceuticals (REGN)
Regeneron Pharmaceuticals (NASDAQ:REGN) has been around since the late 1980s and with a $39 billion market cap can claim to be a success story in the biotech sector.
It has more than 20 drugs in its pipeline and all of them were developed in-house.
It has two drugs in commercial distribution — Eylea for age-related macular degeneration and Dupixent, which treats eczema, asthma and other conditions. Both are coming up against increasing competition.
And if you look at the three-year chart of REGN stock, you can see that the stock is trending lower, year after year. Last year, the stock was off 17%.
With all that money tied up in drug trials, REGN needs a win soon, because its current crop of drugs aren’t going to keep that cash flowing.
Biogen (NASDAQ:BIIB) has been around for 42 years. That’s a long time for a biotech. And its history of success has led it to a market cap of $51 billion in that time.
But time waits for no company. After a less than dazzling 12-month performance of -17%, Barron’s recently named it one of the two worst-performing healthcare stocks of the new year.
It had its ups and downs last year due to its trials of an Alzheimer’s drug, aducanumab.
But those troubles have grown as drug company Mylan (NASDAQ:MYL) looks to challenge BIIB on its hold on its leading drug, Tecfidera. This multiple sclerosis drug represents almost 40% of Biogen’s revenue.
Mylan is asking that it be allowed to make a generic version of the drug and to dismiss Biogen’s hold on it through 2028. Given all the talk about how expensive drugs are in the US, this may not come down on Biogen’s side.
There’s a lot of risk here and some of it isn’t all priced in yet.
Denali Therapeutics (DNLI)
Denali Therapeutics (NASDAQ:DNLI) is a seven-year-old biotech that is stretching from a small-cap to a mid-cap range, with a current market cap just above $2 billion.
The stock IPO’d in December 2018 at 21, and today it trades around 24.
It’s all about neurodegenerative diseases. And that is certainly an exciting space, given the graying of not only the U.S. population, but most industrialized countries.
Its specific focus is Alzheimer’s, Parkinson’s, dementia and ALS, using the lysosomal system of a cell and the glial cells in the brain.
All its drugs are in early stage trials. That means, a lot of its funding could erode if it starts getting bad news on trials. Either that, or other companies make strides faster and get drugs to market, like Biogen.
You can see by its market cap that there is a lot of institutional money behind the company.
There’s also a significant amount of shorts in this biotech stock. That means when the stock goes down, it will go down hard. And when it rallies, it will create a short squeeze. That will run the stock higher simply because of the shorts.
It’s a volatile gamble at best.
As I’ve noted throughout this piece, my counterbalance to these risky biotechs is bulletproof stocks. By buying stocks that are as close to sure things as equities can reasonably be, I’ve made a killing. Some of my successes include:
- Nvidia (NASDAQ:NVDA) — 264% gain
- A top defense stock — 134% gain
- A little-known personnel services pick — 123% gain
- A big-name financial stock — 89% gain
- A top wellness play — 75% gain
Best of all, I’ve named them “bulletproof” because these stocks are resilient! History shows us that S&P 500 stocks that pay dividends outperform their non-dividend-paying brethren in bear markets. And you don’t have to give up growth to own them!
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.