Biotech is a high-octane sector of the stock market that can either deliver instant profits or deliver instant pain.
These “risk on” investments are often more volatile than any other stocks on Wall Street, since they are a favorite play of fast money looking to get in — or out — based on new developments that could result in seismic shifts for publicly traded drug stocks.
So how can you play biotech in a way that allows you to tap into the big potential, but sidestep much of the risk?
Here are three important tips:
Tip #1: For starters, biotech investors should stop messing around with any company they don’t understand. If you simply hear a rumor that some company has some magical drug, you’re likely to see your money disappear. True profits are built on actual facts.
Tip #2: Secondly, don’t ever depend on a one-trick pony. Most good biotech stocks have a pipeline of cures instead of an “all-or-nothing” research plan on one or two drugs. As you’ll see in the following picks, even large and profitable biotechnology companies still have massive breakout potential thanks to many paths to growth.
Tip #3: Lastly, always protect yourself. You should never have 10% of your portfolio in a single stock — even a blue-chip mega-cap stock. Getting overweight in biotech because you’re greedy for gains may end in tears. Plot a good entry and exit, build a diversified portfolio, and act accordingly.
If you follow these tips and dig into the stock picks below, I think you’ll agree the sector holds tremendous potential.
The biggest biotech candidates have seen their pipelines progress nicely in 2017 and are set for big gains in 2018 on gene therapies and other 21st-century treatments. Furthermore, a pro-business environment in Washington means less red tape at the Food and Drug Administration (FDA) and little fear of price controls to restrict profits. Meanwhile, last year’s tax reforms and favorable cash repatriation policies should give companies more cash flexibility to pursue acquisitions.
So where should you put your money if you want to tap into this trend?
That’s where this report comes in!
Here are five high-octane ideas to consider for 2018 to get you started. Of course, please do all your own research and make sure these trades are part of a well-balanced portfolio that keeps your long-term investing goals in mind.
And as always, please don’t hesitate to contact me with your own thoughts and trades at editor@investorplace.com.
Happy trading!
Biotech Stock #1 – Bluebird
Bluebird Bio (NASDAQ:BLUE) is a “Goldilocks” biotech stock that is not too big to grow rapidly, but not so small it faces extreme risk and volatility. BLUE boasts a market capitalization of about $8 billion, which is right in the sweet spot.
Shares of BLUE stock are up more than 50% in the last year. The biggest reason is a cancer therapy for multiple myeloma that saw pretty big success in December 2017, with more than half of patients seeing a complete recovery from the disease. This kind of success is simply too impressive to overlook. In the words of one doctor quoted by a recent Bloomberg news report, “Most of these patients were ready for hospice, and then this came along.”
Then, in January, Bluebird announced that they expect to file 3 gene therapies for FDA approval by the end of 2019. In addition to the aforementioned myeloma drug, Bluebird will be filing for the approval of two drugs which treat severe genetic diseases.
That’s phenomenal news for these patients, and for Bluebird stock holders after shares rallied roughly 35% in the two months following the announcement. BLUE has since fallen to pre-announcement levels, but that doesn’t mean this value is gone — none of these drugs has hit the market yet.
It’s important to note that the trial was undertaken in partnership with mega-biotech firm Celgene Corp. (NASDAQ:CELG) — which should instantly stoke buyout interest.
Multiple myeloma is a fairly common blood cancer without many good treatments, and this drug would be an instant blockbuster upon approval. Celgene would have to be nuts to take a pass on Bluebird after learning the details of this trial up close — and if it does pass, you can be sure some other Big Pharma name will make a move in 2018.
And beyond this treatment, Bluebird has other promising late-stage trials in the works to prove it’s not a one trick pony.
Once that acquisition happens, you can expect a big-time payoff and an instant profit of 50% to 100%.
Biotech Stock #2 – Biogen
Biogen Inc. (NASDAQ:BIIB) is a biotechnology company focused on developing therapies for neurological, autoimmune and hematologic disorders. This big biotech stock disappointed investors for years before finally waking up in 2017 and surging to levels not seen in over two years. Unfortunately, some clinical trial news right as the market dipped sent BIIB lower.
The initial reason for the run was an Alzheimer’s drug study that could theoretically catapult Biogen to the top of this emerging and lucrative market. However, BIIB plunged when the company announced that they were making some changes to the trials for this drug, aducanumab.
In a mid-February presentation to investors, Biogen said that their current trials were creating too much statistical noise — a problem Biogen hopes to fix by adding 500 more patients to the late-stage study.
This sounds like less-than-great news for Biogen, but investors should know that this comes on the heels of competitors canceling their Alzheimer’s drug trials. No company has yet brought a Alzheimer’s drug to market. And even with this delay, Biogen is the leader in a race where all the closest runners have dropped out.
Apart from aducanumab, there’s a lot going on at this nearly $70 billion biotech giant, with some areas of treatment falling behind expectations and others doing quite well. But a big development to watch is a $150 million lump sum payment to privately held Neurimmune Holding Co. in exchange for a reduction in royalty rates on the up-and-coming Alzheimer’s cure. This comes after a separate but similar deal with a Japanese firm to restructure royalties on its aducanumab Alzheimer’s treatment.
Nobody knows for sure how things will play out, but there’s only one reason I can think of for Biogen to pay more up front in exchange for a better rate later — and that’s big optimism over the efficacy of this drug.
And right now, Biogen stock is trading at a 20% discount to its January highs, which makes it a great time to buy BIIB stock.
Biotech Stock #3 – Puma
Puma Biotechnology (NASDAQ:PBYI) shares have roughly doubled since May of last year thanks to an FDA approval for its breast cancer drug under the brand name Nerlynx. Since the initial pop, however, PBYI was dealt a blow when the European Medicines Agency (EMA) did not approve the drug in the EU, and PBYI plummeted. Then, in June 2018, the EMA announced that it was ready to reconsider Nerlynx, and PBYI surged 23% in a single day. Some traders would think that pop means the gains are over, but a look at the performance since this summer shows that is decidedly NOT the case. Puma shares surged and then drifted lower as profit taking set in, but now the stock is ready for its next leg up.
And that leg up will come when EMA actually approves the drug, opening up another gigantic market for Nerlynx. Of course, it’s important to keep your entry price in perspective: Puma is a stock where volatility is the norm.
Remember, for instance, that in 2015, we saw a massive pop and the stock slid all the way back to its prior levels. The news focused on PBYI’s delayed reaction to FDA demands that required it to change how study data was analyzed before filing a marketing application for its cancer drug.
The big jump in 2017 allowed the stock moved above a trading range established over the past two years. And while those prior highs have faded, a risk-on environment in 2018 amid strong economic numbers should mean bulls will quickly take advantage of the new opportunity to enter this stock and ride it back to those levels above $100.
There’s never a sure thing in biotech, but PBYI is doing all the things you want to see from a technical perspective and from a drug pipeline perspective. Breast cancer cures are in high demand, and an approval in this space is the Holy Grail for cancer-focused biotechs. That should give you confidence to buy on recent consolidation.
Biotech Stock #4 – Amgen
Amgen Inc. (NASDAQ:AMGN) was all the rage as Wall Street focused on the potential of next-generation cures out of the biotechnology industry a few years ago. But for the better part of three years, it hasn’t budged as revenue has plateaued.
But this happens to many stocks as they mature — even to a once-hot biotech name. And the good news now is that Amgen has embraced its role as a $120 billion healthcare powerhouse, choosing to satisfy shareholders via dividends instead of wasting money on knee-jerk acquisitions or other fruitless efforts to chase unrealistic growth. AMGN has increased payouts a massive 310% since instituting regular dividends in 2011, but those payouts remain roughly a third of earnings and they are ripe for future increases as well.
Adding fuel to the fire is the fact that AMGN finally began to break out of its range-bound rut in 2017 and a quick look at the chart shows a consistent pattern of slowly rising prices with the floor moving higher in kind. A series of “higher lows” like this is the sure sign of an upside move and that investors have confidence the gains will stick going forward.
And why not? Amgen has such a full, robust pipeline that it’s often difficult to pinpoint what its most exciting recent news is. But at the moment, the answer is Aimovig. Aimovig recently gained FDA approval for migraine prevention after showing that many patients saw a 50% reduction in migraines. Migraines affect millions of people in the U.S. alone, so the potential market here is huge.
That may energize AMGN stock in 2018 and beyond, allowing this biotech stock to get back to its rightful place at the top of the sector.
Biotech Stock #5 – Vertex
Shares of Boston-based Vertex Pharmaceuticals (NASDAQ:VRTX) exploded last year with a roughly 100% gain in the first part of 2017. Since then, shares have been largely rangebound — though with several attempts to breakout — and it seemed like the gains are largely behind VRTX.
Not so fast. This is a familiar pattern in biotechs, where the fast money takes profits and causes — sometimes repeated — rollbacks… but then longer-term investors continue to buy and the rally resumes momentum.
Keep in mind that the initial pop was only partly based on long-term optimism over Vertex’s two cystic fibrosis drugs, branded Kalydeco and Orkambi. Both drugs have performed well with combined sales increasing almost 21.5% year-over-year, and investors have liked what they’ve seen.
Recent dips have been caused by concerns over competition with these two drugs. However, not only have the main competitors — Galapagos (NASDAQ:GLPG) and AbbVie (NYSE:ABBV) show less-than-stellar results in their clinical trials — but Vertex CEO Jeff Leiden has asserted that Vertex’s first-mover advantage would be more than enough to overcome any eventual, possible competition.
Worries over competition also don’t take into account Vertex’s future products. In fact, the real catalyst for future gains could be an extensive pipeline of other cystic fibrosis drugs that refine on the success Vertex has already seen. The company is evaluating some next-generation cures that will actually supplement existing drugs — giving it a three-pronged approach to CF, and three different revenue streams as a result!
Data from studies in 2017 demonstrated that combinations of Vertex drugs led to pronounced improvement in lung function for patients in what could be the first test showing treatment of the underlying cause of cystic fibrosis, instead of just mitigating the symptoms.
Vertex recently initiated pivotal phase III studies on its “triple combination” regimens in the first half of 2018.
If the test is a success, then it will not only allow Vertex to treat CF in a better way, but it will allow a much wider patient pool — and potential customer base — for its lucrative drugs.
No wonder shares rallied strongly through March. Consider the modest rollback in shares recently as your chance to buy in now if you didn’t get in on the ground floor. Don’t wait until a new surge takes place on favorable drug trials.
