Over the past several months healthcare has become a top priority around the globe. Many now regard a potential drug, or a vaccine, as a fast track to a normal life. As a result, shares of a large number of biotechnology — as well as pharmaceutical and biopharmaceutical — stocks have done quite well. However, regardless the prospects of a vaccine, the biopharma industry offers growth prospects. Therefore today, we will discuss four biotech stocks to buy with or without novel coronavirus plans.
According to the U.S. Food and Drug Administration, a drug patent lasts for 20 years. Research and development is at the center of drug development. In the United States, developing a new prescription medicine is likely to cost well over $2 billion. The global pharmaceutical industry’s annual investment in R&D stands close to $150 billion a year.
Research led by Namryoung Lee and Jaehong Lee posits that “… in order to sustain operation in the highly competitive market, these firms must receive investments in R&D. This need for reliable and constant R&D funding makes investing in biotechnology firms potentially risky.”
With that information, here are four biotech stocks to consider for the rest of the year:
- Health Care Select Sector SPDR Fund (NYSEARCA:XLV)
- Ironwood Pharmaceuticals (NASDAQ:IRWD)
- iShares Nasdaq Biotechnology ETF (NASDAQ:IBB)
- SPDR S&P Biotech ETF (NYSEARCA:XBI)
Biotech Stocks: Health Care Select Sector SPDR Fund (XLV)
Expense Ratio: 0.13% per year, or $13 on a $10,000 investment
The Health Care Select Sector SPDR Fund tracks the Health Care Select Sector index. Pharmaceuticals, Healthcare Equipment & Supplies, and Healthcare Providers & Services are the top three sub-sectors.
The U.S. has the highest healthcare spending among developed nations, and we can expect this level of spending to continue. The top ten holdings of the fund constitute over 50% assets under management.
XLV has 61 companies and the top three are UnitedHealth (NYSE:UNH), Merck (NYSE:MRK) and Johnson & Johnson (NYSE:JNJ).
So far in 2020, the fund is up over 3%. In fact it reached, earlier in September, the XLV ETF hit an all-time high of $109.74. The current volatility in the markets is likely to push the fund below $100 or even toward $95. Its trailing price-earnings and price-book ratios stand at 17.75 times and 4.41 times, respectively. Therefore a potential drop in price would enable the fund to offer better value.
Ironwood Pharmaceuticals (IRWD)
Boston-based Ironwood focuses on therapies for patients who live with gastrointestinal (GI) diseases. The biotechnology firm is well-known for Linzess, its drug for irritable bowel syndrome (IBS) and chronic idiopathic constipation (CIC). The group also has other pipeline products for gastrointestinal disorders.
According to recent research directed by Dr. Christopher Almario of the Cedars-Sinai Medical Center, “Digestive diseases account for over 100 million ambulatory care visits annually in the U.S. … The burden of gastrointestinal (GI), liver, and pancreatic diseases in the U.S. is staggering, as they are substantial sources of morbidity, mortality, and cost. … In a representative sample of over 71,000 Americans, we found that nearly 2 out of 3 individuals are burdened by GI symptoms.”
Put another way, the growth opportunity of its Linzess drug is substantial. In fact in 2019, global sales approached $1 billion. Ironwood collaborates with other biopharma groups such as AstraZeneca (NYSE:AZN) to distribute the drug globally.
The stock had a robust year in 2019 while the price rose over 50%. Part of the reason behind this increase was a restructuring move. Ironwood spun off its non-core, clinical-stage assets as a new company, Cyclerion (NASDAQ:CYCN). So far in 2020, the stock is down about 25%. Potential investors may regard the drop in the share price as opportunity to buy IRWD stock for the long term.
Biotech Stocks: iShares Nasdaq Biotechnology ETF (IBB)
Expense Ratio: 0.46%
The iShares Nasdaq Biotechnology ETF is currently one of the largest exchange-traded funds. It tracks the Nasdaq Biotechnology Index and invests in over 200 companies. Its five largest holdings include Amgen (NASDAQ:AMGN), Vertex Pharmaceuticals (NASDAQ:VRTX) and Gilead Sciences (NASDAQ:GILD).
So far in 2020, IBB is up over 12% and hit an all-time high earlier in the summer. In September, a drop toward the $120 level is likely. This could provide potential IBB investors with a better entry point. Its trailing P/E and P/B ratios stand at 21.87 times and 5.6 times, respectively. A price decline of around 7%-10% would provide better value for long-term shareholders.
Its beta value of 1.1 means IBB is slightly more volatile than the broader market. Therefore, if you are a short-term trader, it is time to proceed with caution. The fund is likely to be more volatile than the broader market.
SPDR S&P Biotech ETF (XBI)
Expense Ratio: 0.35%
The SPDR S&P Biotech ETF provides exposure to all sizes of biotech stocks. The top three companies are Immunomedics (NASDAQ:IMMU), Novavax (NASDAQ:NVAX) and Invitae (NYSE:NVTA).
Its trailing P/E and P/B ratios stand at 17.6 times and 5.5 times, respectively. Year to date, the fund is up around 20%. Like the other funds, earlier in July, it reached an all-time high near $121.
If you would like to invest in a wide range of companies in the biotech sector, you may consider buying XBI around $95 or below.
Such a drop in price from the current levels would provide a better margin of safety.
On the date of publication, Tezcan Gecgil did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
The author has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. She also publishes educational articles on long-term investing.
