The biotech space is hot right now. And it’s likely to continue that way for some time. This is a rich space where investors can find market-beating potential far beyond the more traditional names that tend to dominate Wall Street.
The best biotechnology stocks come in a variety of shapes and sizes. Some may focus on treating an individual disease; some may have many. Some are penny stock startup companies; others are dividend stocks. Most trade on the Nasdaq, but a few are considered blue chips and trade on the NYSE. Many are owned by institutional investors, but some of the top performers in the years ahead are still small plays only available to retail investors.
Best Biotech Stock #1: Vertex Pharmaceuticals (VRTX)
One of the top biotech stocks in the industry, Vertex is focused on developing therapies for treating cystic fibrosis. That includes a number of products currently going through trial as well as existing products. The company has a number of partnerships and collaborations with other top biotech and pharmaceutical companies as well.
Thanks to its various drugs and strong pipeline, the pharmaceutical company has been a strong performer. Revenues are up 76 percent in the past year, and profit margins are an impressive 31 percent. That’s helped shares rally nearly 70 percent in the past year, and there’s more room to run.
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There’s low risk of this biotech play going broke against investors either. Besides the company’s robust and growing cash flow, Vertex has over $3.5 billion cash in the bank after its debt.
Best Biotech Stock #2: Bristol-Myers Squibb (BMY)
This major drug manufacturer has a broad-based suite of drugs covering a number of products. This includes anti-cancer drugs, stroke prevention, leukemia, melanoma, hepatitis B and others. It’s also the parent company of Celgene, a well-respected researcher for cancer treatments, and has bet a bit on gene therapy.
As more of a drug manufacturer than a biotechnology firm working purely on creating new treatments, the company has steady, established cash flows. The most attractive aspect of those strong cash flows are that they create a biotech dividend play.
Shares yield just under 3 percent right now. While it’s not a huge dividend, the company has had a history of raising its payouts, and just bumped the pay from $1.72 to $1.80 annually.
Best Biotech Stock #3: Regeneron Pharmaceuticals (REGN)
Another diversified player in the biotech space, Regeneron develops, manufactures, and sells a variety of medicines. Some of their major drugs involve treating eye diseases, allergy and inflammatory diseases, cancer, and cardiovascular diseases among others. It’s also one of the many companies currently working on treatments to combat Covid-19.
Whether or not the company finds a treatment, Regeneron has seen some impressive growth in the past year. Revenue is up by a third, and profit margins are closing in 30 percent. While that’s not quite as good as Bristol Myers, the company’s work on Covid-19 treatment has kept shares in the spotlight with a 117 percent return in share price in the past year.
There’s likely more room to run, even if its efforts for a coronavirus vaccine or other treatment don’t bear fruit.
Best Biotech Stock #4: Viking Therapeutics (VKTX)
A smaller player in the biotechnology space, Viking Therapeutics is working on the development of therapies for metabolic and endocrine disorders. As an early stage player, the company is yet to be profitable, losing about $30 million in the past year.
While the company is too small and lacks the steady cash flow and revenues to support a dividend, corporate insiders own 11 percent of shares, a reasonably high percentage to ensure that their interests are aligned with other investors over the long haul.
However, the company has almost no debt and nearly $270 million in cash, which is over half the company’s market capitalization. That’s a small cap biotech play that value investors may want to examine more closely, as the stock price is likely undervalued.
Best Biotech Stock #5: Gilead Sciences (GILD)
Gilead focuses on drugs to treat HIV and liver diseases, among others. The company has a robust pipeline of drugs, and a sizable number of collaboration agreements with some major producers, but is mostly pushing for innovation as a clinical stage biotechnology company.
On the Covid-19 front, one of the company’s antiviral drugs, remdesivir, has shown promise as a potential treatment in clinical trials. Despite this promising treatment, Gilead has underperformed relative to other biotech companies with a Covid plan, with shares up just 20 percent in the past year.
Shares of Gilead have been volatile over the years, but it is another dividend-paying biotech company making it a blue chip of the Nasdaq space. Shares yield 3.5 percent, and the annual dividend yield was just increased from $2.57 to $2.72 annually.
Best Biotech Stock #6: Avid Bioservices (CDMO)
After years of underperforming the broad market, pharmaceutical and biotech companies have been major performers. Typically, any company working around the clock on a Covid vaccine has gotten the top returns, as well as the headlines.
But in any rush, there’s always an equipment supplier. It’s not as exciting a story behind it, but it can be much more consistently profitable.
That’s the case with Avid Bioservices (CDMO). It’s a contract development and manufacturing company, focusing on products like antibodies and recombinant proteins.
That’s an unusual product to sell, and it’s a highly regulated space that keeps new competitors at bay, even right now.
But even better? Shares are inexpensive but have a lot of upside over the next few years. This is one surprising Covid play that hasn’t gotten a lot of attention yet.
Best Biotech Stock #7: Moderna (MRNA)
Moderna has been one of the hot biotech names of 2020, as the company has been working to develop a vaccine candidate for Covid-19. That’s allowed shares to skyrocket from $20 to $95 since the start of the year, and rallying while the rest of the stock market has faltered.
Although the company is still in early stages and is not yet profitable, Moderna has a cash-rich balance sheet with over $1.1 billion in net cash. And with the rally going on right now, the company could issue more shares if needed.
The company’s focus on therapeutics and vaccines for infectious diseases, rare diseases, and cardiovascular diseases gives it a much broader base to work from than just a potential Covid-19 vaccine. That’s why, even with the company’s monster rally in shares, there’s still a lot more potential for investors here in the year ahead.
What is a Biotech Stock?
The combination of biology and technology, a biotech firm is any firm that involves the use of living organisms. Biotech firms are best known for their medicinal purposes, but a biotech company could also cover food science and agricultural needs as well. In short, they’re a bit like the tech players of healthcare stocks.
Is Biotech a Good Investment?
As with all investments, it depends! Biotech stocks can have some great years, followed by some lean years. And individual names are even more volatile depending on what they’re producing and how in demand it is. With the rise of Covid-19, biotechs have gone from being an out-of-favor part of the market to a red hot one, a trend likely to continue for the next several years.
What are the Pros and Cons of Investing in Biotech Stocks?
Given the massive return potential from a biotech company that comes up with a treatment for a disease, biotech stocks can be a huge source of profit potential. However, investors need to be aware that it’s not that easy.
Many companies working to develop a new drug may spend millions of dollars and fail, or end up caught up in a long FDA approval process and run out of funds. So it’s important to find attractive opportunities and companies with the cash flow or cash on hand to bring a new drug to market.
Can I Buy a Biotech ETF?
Yes, there are a number of biotech-related ETFs so that an investor can buy the entire biotech sector. Although the Nasdaq Biotechnology ETF is the best known, the SPDR S&P Biotech ETF (XBI) is an interesting and attractive play for investors interested in a biotech ETF. That’s because the ETF is equally-weighted. So if one biotech name in the fund’s portfolio does well, it has a much better chance of improving the fund’s overall performance. Most mutual funds and ETFs (and indices like the Nasdaq) are weighted by market cap, meaning large, established companies already top the index. But an ETF will ensure you own the best biotech stocks.