Special Report: The 6 Best Stocks in Biotech

When the biotech sector gets hot, it gets red-hot.

The returns are scorching.

From January 2012 to July 2015, the iShares Nasdaq Biotech ETF (NASDAQ: IBB) tripled in value, as the stocks it held blew up by magnitudes of 100% and even 1,000%.

Of course, the market being the market, nothing lasts forever.

So, after three years of stellar gains, the biotech sector cooled.

IBB dropped 9.25% in the final six months of 2015. And in 2016, it dropped roughly 20%. And that was nothing compared to the 285% gain it delivered during its magnificent bull run, but it was enough to spook investors.

Now, here’s the thing: Since the start of 2017, IBB is up more than 17%.

It’s doubled the return of both the Dow and the S&P 500.

Biotech is back in a big way.

And there are a few reasons for this.

Perhaps the biggest, though, is that concerns about political interference have abated.

There was a lot talk about high drug prices during the 2016 presidential campaign. Price gouging was dragged into the spotlight by obscene personalities like Martin Shkreli.

Shkreli infamously imposed a 5,000% price hike on a drug used to treat HIV patients and other people with weak immune systems. He’s currently on trial for allegedly defrauding investors and paying off hedge funds.

That’s not great press for the pharmaceutical industry.

Beyond that, there were concerns about the future of Obamacare and speculation about new regulations. Those have since dissipated.

And now, Biotech is roaring again.

IBB (the sector ETF), blue chips (Big Pharma), and small- and mid-cap drug developers are all gaining momentum. Calithera Biosciences shot up 338%, Esperion Therapeutics went up 175%, and Puma Biotechnology jumped 161%.

Biotech sales are projected to increase from $107 billion this year to $128 billion by 2019. This means that consumers will be buying 20% more drugs in just two years.

Investors are rushing back into the fold, and M&A activity is heating up. Collectively, biotech firms now hold some $500 billion in cash.

And yet, despite all of this, many biotech stocks remain undervalued following the gut punch that the industry took in 2016.

So, here’s a look at the six best biotech bargains out there today...

Big Pharma’s Best Bets

Let’s start with the bigger companies, which offer more in the way of stability but also less dynamic returns.

Three names to consider are Gilead Sciences (NASDAQ: GILD), Celgene Corporation (NASDAQ: CELG), and Biogen (NASDAQ: BIIB).

Gilead is one of the companies that suffered from the backlash against high drug prices.

The company came under fire for the cost of its hepatitis C drugs, Sovaldi and Harvoni.

Sovaldi's list price is $84,000 for a course of treatment, and Harvoni's is $93,500. That's a lot to pay, but Gilead can get away with it because its drugs are the best on the market right now.

They come in tablet form instead of injections, and they also have better cure rates and shorter treatment times than the competition.

Turns out that you can charge whatever you want when your drugs are better than everyone else's. And it's legal, too. Antitrust laws only come into play when there's anticompetitive behavior.

That's definitely not the case here since Gilead is already facing pricing pressure from competitors.

Still, Gilead controls three-quarters of the hep C market. Again, this is because its products are superior.

So, what we really have here is a bargain.

The stock shot up 536% from 2012 to mid-2015. And then, it promptly shed 40% of its value.

Now, it’s coming back and is up 9% since mid-June.

Part of the reason for the rally is that former Gilead lobbyist Joe Grogan was put in charge of President Trump’s Drug Pricing and Innovation Working Group. That group is now considering a proposal that would issue 10-year U.S. Treasury bonds directly to drug manufacturers to help Medicaid and Medicare pay for its pricey hepatitis C treatments.

That would be an absolute boon for Gilead. There’s also speculation that the company will look to take over a smaller drug developer to compensate for its slowing hep C business.

Celgene, meanwhile, has surged more than 17% since January.

Like Gilead, Celgene was soured by price hikes for its flagship drug, Revlimid. The dissipation of price-control legislation is welcome news as the company moves into the emerging adoptive cell therapy market. These are anticancer cell therapies that are tailored to individual patients. And they're likely to bring sky-high price tags when they reach the market.

In addition to these short-term gains, Celgene has also proven to be a strong long-term investment. It’s yielded 11.80% EPS growth and 18.30% revenue growth over the past five years.

Lastly, there’s Biogen.

Roughly 40% of Biogen’s sales came from its top-selling multiple sclerosis (MS) drug, Tecfidera. As with Gilead’s hep C drugs, Tecfidera holds major advantages over its competition. Namely, it’s taken orally rather than being injected.

Tecfidera sales growth has slowed as it's come to dominate in the U.S. But there’s still potential for more growth overseas where the drug commands just one-fifth of the market...

Beyond that, Biogen's anti-CD20 drugs, Rituxan and Gazyva, combine for more than $1 billion of quarterly sales. That tops Tecfidera, but Biogen splits revenue on those two drugs with Roche. And Spinraza, its new drug for spinal muscular atrophy (SMA), is off to a strong start with sales of $47 million in its first full quarter on the U.S. market.

Biogen also has two Alzheimer's drugs in the pipeline. Those medications, aducanumab and E2609, could be a boon for the company, but their phase three trials won’t finish until 2020.

And again, a potential acquisition can’t be ruled out for a company with nearly $6 billion on hand.

Biogen, Gilead, and Celgene all recently had their ratings upgraded by Jefferies, which targeted potential gains of 13%, 15%, and 21% for the stocks respectively.

So, those are some of the bigger players.

Now, we're going to turn our attention to the smaller players, which have less stability but offer greater potential rewards than the larger firms.

Biotech Breakouts

Portola Pharmaceuticals (NASDAQ: PTLA) is up 185% this year. The stock made its biggest leap in June when the FDA approved the VTE drug Bevyxxa.

The approval wasn’t entirely a given since Bevyxxa narrowly missed its primary endpoint in its phase three study. Nevertheless, the once daily oral drug demonstrated significant health benefits over the competition, reducing both blood clots and death rates.

As a result, Portola Pharmaceuticals' lead drug could soon be the go-to anticoagulant for deep vein thrombosis (DVT). Portola anticipates launching Bevyxxa sometime between August and November of this year.

Wall Street analysts anticipate about $1 billion in peak annual sales, and it will certainly attract takeover speculation.

Vertex Pharmaceuticals (NASDAQ: VRTX) has also experienced a surge, up 75% this year. The company owns the top-selling cystic fibrosis (CF) drug, Orkambi. And it recently raised its price by 5% to around $273,000 per year.

Furthermore, in March, Vertex announced positive results from two late-stage studies of a combination of tezacaftor and Kalydeco in treating CF. Based on these results, the biotech plans to submit the combo for approval in the U.S. and Europe within the next few months. This means that the drugs could be cleared to go to market next year.

Indeed, while Orkambi has been and will continue to be a huge success, the drug does have a drawback. Some patients have stopped taking it because of respiratory problems. Concerns about these massing discontinuations caused Vertex's stock to slump nearly 40% last year.

The tezacaftor-Kalydeco combo doesn't appear to have those negative side effects.

So, this new combo, along with label expansions for Kalydeco and Orkambi, could be a key growth driver in the near future. There are currently around 29,000 CF patients who are eligible for treatment with Kalydeco and Orkambi. Vertex hopes to increase that target population to 44,000 patients with its new offerings.

Vertex’s track record is also impressive. It’s defeated its earnings estimates in seven of its past nine operational quarters by an average of 27.39%.

Some analysts have already floated the company as a takeover target for Gilead.

And finally, there’s Intercept Pharmaceuticals (NASDAQ: ICPT), which is up just 15% this year.

As it stands now, Intercept has just one FDA-approved therapy on pharmacy shelves. That’s Ocaliva, which treats primary biliary cholangitis (PBC). This provides Intercept with some recurring revenue, but it won't carry the stock much higher from here. Peak sales from the PBC treatment are only expected to total around $290 million.

However, Ocaliva is also currently in the midst of a phase three trial for patients with nonalcoholic steatohepatitis (NASH). NASH (or fatty liver disease) affects between 2% and 5% of all adults in the U.S. And it’s likely to become the leading cause of liver transplants within the next decade.

NASH can also lead to liver fibrosis, liver cancer, and even death. So, a drug that provides a real shot at stopping such liver diseases in their early stages could be a huge opportunity. This gives Intercept tremendous upside potential.

If all goes according to plan, the drug is going to hit the market by 2020, or possibly even 2019. If approved, the drug could produce $7 billion in annual sales. Yet, as a company, Intercept is currently valued at just $3 billion.

So, there you have it: Gilead, Celgene, and Biogen are among the large-cap leaders. And Portola, Vertex, and Intercept are smaller developers with strong pipelines and also the potential to be bought out.

Overall, the biotech sector will always be somewhat volatile. But it's rolling now and will continue to do so.

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