I’ve written before about how biotech is the biggest technology trend of our kids’ generation. Naturally, that means many people are looking for the best biotech stocks to buy.
But as with the PC industry of my time, finding long-term winners is difficult.
Back in the early 1980s, dozens of companies entered the PC market, many of them huge for their time. IBM (NYSE:IBM) was the bet everyone made. But the BUNCH — Burroughs, Univac, NCR (NYSE:NCR), Control Data and Honeywell (NASDAQ:HON), were all involved. Almost all of them gave way to newcomers Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT). Apple went public in 1980 and Microsoft in 1986.
Similarly, there are huge companies involved in today’s biotech boom. But size is no guarantee of future leadership. There are also big differences between today’s boom and the one that came before. Regulation — the need for drug or device approval — is just one of them.
An investor is thus wise to spread their bets and be ready to bail at the first sign of failure. Many will be called to the throne of biotech riches. Few will be chosen. Young biotech scientists, like my own son, can expect to have long resumes years before they reach my age.
While PCs and biotech offer similar profit opportunities, the need for government involvement makes them very different. So does the nature of the work. There are opportunities in equipment, in the production of molecules, and in the results of basic research as well as drugs.
I have compared many new biotechs to oil wildcatters in 1930s Texas because they’re taking big risks and can be sunk by a single failure. This puts today’s large drug companies in better shape to survive than mainframe companies were 40 years ago. Their cash can turn what looks like a losing play into a winner.
Here’s my list of the best biotech stocks to buy.
Best Biotech Stocks: iShares Biotechnology ETF (IBB)
Starting a gallery of the best biotech stocks with an exchange-traded fund (ETF) can seem like a form of giving up. But, as with the PC business, it may be the best path to success.
BlackRock’s (NYSE:BLK) iShares Biotechnology ETF (NASDAQ:IBB) tracks a market-weighted index of biotech stocks listed on U.S. exchanges. These are subject to capping requirements, with no more than 8% in any one stock. The expense ratio is low at 0.44%, and there are $7.94 billion of assets under management.
SPDR S&P Biotech ETF (NYSEARCA:XBI), the Invesco Dynamic Biotechnology & Genome ETF (NYSEARCA:PBE) and ALPS Medical Breakthroughs ETF (NYSEARCA:SBIO) are other examples of biotech ETFs you can buy with a few clicks.
What all these funds, including IBB, have in common is a rotten 2022. IBB is down 31% so far in 2022. Among the companies it has positions in are Gilead Sciences (NASDAQ:GILD), Moderna (NASDAQ:MRNA), Regeneron (NASDAQ:REGN) and Biogen (NASDAQ:BIIB).
Many of IBB’s holdings have drugs in the market. Others have drugs about to be approved, or in late-stage testing. As new leaders emerge, funds like IBB buy them, and as companies fall out of favor IBB sells them. They’re not trying to beat the market, just match it. If you don’t know what you’re doing (and no one does), matching the market is a good strategy.
CRISPR Therapeutics (CRSP)
CRISPR Therapeutics (NASDAQ:CRSP) was founded in 2012 around the Nobel Prize-winning research of Emmanuelle Charpentier, a French scientist who shared her prize with Jennifer Doudna of the University of California at Berkeley.
CRISPR is an acronym short for “clustered regularly interspaced short palindromic repeats.” CRISPR-Cas9, the technique for which Charpentier and Doudna won their award, allows the chemical editing of DNA.
CRSP is thus seen by some investors as the “Apple of DNA editing,” but the future is unknown. It could end up like IMSAI or Cromemco, depending on how things play out.
For now, the company is doing well. It had revenue of $915 million in 2021, and $4.70 per share, fully diluted, of net income. That means it’s selling for under six times sales and just 18 times earnings.
Despite this, CRSP is down nearly 80% from its 2021 high as investors have abandoned development-stage biotech companies. Vertex Pharmaceuticals (NASDAQ:VRTX), with which CRISPR is partnering, plans to file this year for approval on drugs targeting sickle cell anemia and beta thalassemia. An investor day over the summer showed promise with drugs for diabetes and kidney cancer.
Best Biotech Stocks: Merck (MRK)
Merck (NYSE:MRK) is not technically a biotech, but it illustrates an important trend for biotech investors. That is, companies like CRISPR lack the resources to get drugs tested and past regulators. (Pioneering PC makers could just slap something together and sell them through ComputerLand.) Larger companies are often needed as partners, and this requirement offers incumbents with cash the opportunity to dominate.
At the start of July, Merck was worth $234 billion, with annual sales of nearly $49 billion from drugs like Keytruda, a cancer drug, Gardasil, a vaccine for human papillomavirus, and the anti-diabetic medicine Januvia. But, given that patents offer only 20 years of exclusivity on new compounds, Merck is constantly on the hunt for new drugs.
The current Merck pipeline includes 83 drugs in Phase-2 study, where drugs are given to people with the condition being treated, with 30 in Phase-3 studies testing safety and efficacy, and 3 programs under review by regulators.
But Merck’s most important asset may be its cash, with over $10 billion at the end of June. This can be used to buy out other companies and to fund their research. With the whole biotech sector on its back in the current market, this is a huge opportunity.
For investors, Merck also sports a price-to-earnings multiple under 14 and offers a dividend yield of over 3%. It’s a value stock.
Amgen (NASDAQ:AMGN) is large like Merck but was born in the biotech era.
It was founded in 1980. Its first success with DNA led to the development of drugs like Epogen, used to treat anemia associated with chemotherapy and kidney failure. The company’s sales in 2021 were nearly $26 billion, led by the arthritis drug Enbrel and Prolia for thinning bones. The company’s pipeline includes over a dozen drugs in Phase-3 trials.
As with Merck, Amgen also has a lot of cash, $5.2 billion at the end of June. Its $7.76/year dividend yields 3.4% and its price-to-earnings ratio is 19.33.
Lately, Amgen has been focusing on its induced proximity platform, shunning what it calls “low-hanging fruit” in hopes of finding compounds that can treat multiple diseases for which there are currently no treatments. It’s also in the biosimilars space, working on a drug that will mimic the action of AbbVie’s (NASDAQ:ABBV) blockbuster Humira. Biosimilars can improve the rate at which patented drugs are replaced by generics.
Best Biotech Stocks: Ionis Pharmaceuticals (IONS)
Ionis Pharmaceuticals (NASDAQ:IONS) illustrates the promise and the risk in today’s biotech market.
Ionis is best known for Spinraza, licensed to Biogen for the treatment of spinal muscular dystrophy in 2016. Sales in 2021 were $810 million but came with a loss of $29 million, 20 cents per share, as the company continued to spend heavily on new drugs.
These include a rare disease drug called eplontersen, for which it has partnered with AstraZeneca (NASDAQ:AZN). Ionis took $200 million for it last year with the hope of $3.4 billion more if it achieves clinical milestones. The target is a usually-fatal hereditary disease called ATTRv-PN. It is also working with Biogen on an ALS drug called tofersen.
Unfortunately, Ionis has also failed on at least four drugs in the last year. This has caused some analysts to back away, with three telling investors to sell.
Exelixis (NASDAQ:EXEL) is best known for cabozantinib, a kinase inhibitor used to treat some types of thyroid, kidney and liver cancers. Exelixis is a good example of a biotech seeking to capitalize and expand on a single big success.
A kinase inhibitor blocks the action of a type of enzyme, in this case, tyrosine. The best-known kinase inhibitor is Merck’s keytruda. These drugs often have side effects that require study and can inhibit effectiveness. While cabozantinib was first approved in 2012 for some thyroid cancers, Exelixis had to lay off 70% of its employees in 2014 after it failed a Phase-3 trial for prostate cancer.
By 2021, however, Exelixis had sales of over $1.4 billion and a net income of $231 million, or 72 cents per share. It has a market cap of $5 billion and a PE ratio of 20.
At the end of June, Exelixis had $1.5 billion of cash and securities on the books. The cash let it begin an investigation of three compounds from BioInvent’s n-CoDeR library of antibodies. The company is also involved in patent suits aimed at protecting its cabozantinib franchise and has begun a Phase-3 trial on a new tyrosine inhibitor for colorectal cancer.
Best Biotech Stocks: Twist Bioscience (TWST)
Twist Bioscience (NASDAQ:TWST), founded in 2013, manufactures synthetic DNA, a manufacturing process that lets companies speed the production of DNA for study. In 2021 it had sales of $133 million and lost $152 million, or $3.15 per share. Its market cap at the end of June 2021 was $2 billion. In Nov. 2021, at the height of the tech boom, it was over $5.5 billion.
Twist is one of the hundreds of companies, public and private, aiming to supply other drug companies with key research and production technology. As with companies that seek to create and sell drugs, there is enormous risk, but there are also huge markets on offer.
Twist stock bounced at the end of June when it announced a deal to license its antibody libraries to Ildong Pharmaceutical, a Korean company. Twist will get milestone, maintenance, and possible royalty payments in the deal. It also signed a partnership agreement with Astellas Pharmaceutical (OTCMKTS:ALPMY) of Japan in May, and it has a supply agreement with Gingko Bioworks (NYSE:DNA).
On the date of publication, Dana Blankenhorn held long positions in AAPL, MSFT and MRNA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Editor’s note: This article is regularly updated with the latest information.