Quite a few bigwigs in the biotech sector have reported results for the fourth quarter and the picture is ordinary. While results have been mixed, the outlook provided by most of these companies is encouraging, indicating bright prospects driven by new drug approvals and positive pipeline updates. The macroeconomic environment, however, remains uncertain and growth might be sluggish.
Meanwhile, biotech companies are in the spotlight as pharma/biotech giants are now looking to bolster their product portfolios and pipelines through collaborations and buyouts with their legacy drugs face generic challenges. Hence, M&A is back in the spotlight. Given the continuous need for innovative medical treatments, irrespective of the state of the economy, the biotech industry can be a haven, despite the inherent volatility and uncertain macroeconomic environment.
Biotech companies like Sarepta Therapeutics, Inc. SRPT, Exelixis, Inc. EXEL, Immunocore Holdings plc IMCR, Editas Medicine, Inc. EDIT and Puma Biotechnology, Inc. PBYI are poised to outperform the volatile sector.
Industry Description
The Zacks Biomedical and Genetics industry includes biopharmaceutical and biotechnology companies that develop high-profile drugs using path-breaking technology. These biologically processed drugs, which address virology, neuroscience, metabolism and rare diseases, are manufactured using live organisms. As technology becomes paramount to improving global health, the main goal of biotech companies is to use innovative technology to create breakthrough treatments in quick time. Quite a few companies in this space are developing vaccines using modern technology. Given the dynamic and evolving nature of technology, the sector is perceived to be riskier than the large-cap pharma or drug industry.
4 Trends Shaping the Future of the Biotech Industry
Innovation, Execution Hold the Key: As only a few companies in this industry have approved drugs in their portfolio, the focus is primarily on the performance of high-profile drugs and pipeline development. Most companies spend millions and billions to create a drug with path-breaking technology, which results in significant research and development expenditure. Sometimes, modern treatments might come with side effects, which surface with time and the uptake might fail to meet the expectations. Hence, it takes several years before a biotech company turns profitable. Additionally, successful commercialization is the key to higher drug uptake, as smaller biotechs generally lack the funds and expertise to reach the targeted population. This, in turn, prompts collaboration deals with either pharma or biotech bigwigs, wherein sales are shared or royalties are received. Moreover, it may take quite a few years for any newly-approved drug to contribute significantly to its company’s top line.
M&A in Spotlight: Consolidation has always taken the center stage in the biotech industry. This is because leading pharma/biotech companies look to diversify their revenue base in the face of dwindling sales of their high-profile drugs. Acquisitions also make sense as developing a drug/technology from scratch is not just a costly but also a risky affair. After a lull of almost two years, pharma and pharma/biotech bigwigs are now looking to bolster their portfolios.
The influx of cash from big pharma further propels the biotech sector. Gilead Sciences recently announced that it will acquire CymaBay Therapeutics to strengthen its liver disease portfolio. Bristol Myers acquired oncology-focused company Mirati Therapeutics last month and announced two other back-to-back acquisitions in late 2023.
Novartis recently announced that it will acquire MorphoSys after the Chinook Therapeutics buyout in 2023. Biogen had earlier acquired Reata Pharmaceuticals. While oncology and immuno-oncology are the key focus areas, treatments for obesity, rare diseases and gene-editing companies also hold potential, making them lucrative investment areas. An attractive pipeline candidate is the key lure for these companies. Cost synergies in research and development are added benefits, as quite a few smaller biotech companies are using innovative technologies to develop drugs and treatments.
New Drug Approvals Boost Prospects: The pace of new drug approvals took a hit with the industry’s primary focus on COVID-19 treatments. Nevertheless, new drug approvals saw a surge in 2023. With increasing R&D spending in 2024 and most companies looking to diversify, new drug approvals are likely to see an acceleration going forward.
Pipeline Setbacks & Competition Hurt: Pipeline setbacks are key deterrents for biotech companies, given the exorbitant cost of developing drugs using expensive technology. Most drugs/therapies take years to gain a regulatory nod. An unfavorable outcome from a crucial trial on a promising candidate is a huge setback, particularly for smaller biotechs, which are mostly one-trick ponies. The leading biotechs face other headwinds, including declining sales of high-profile drugs due to intensifying competition.
Zacks Industry Rank Indicates Decent Prospects
The group’s Zacks Industry Rank is basically the average of the Zacks Rank of all the member stocks.
The Zacks Biomedical and Genetics industry currently carries a Zacks Industry Rank #91, which places it among the top 36% of more than 250 Zacks industries. The rank mirrors a decent outlook for the space, probably due to the consistent demand for better medical drugs/treatments, even though the macroenvironment is challenging. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few biotech stocks that are well-positioned to beat the industry based on a strong portfolio/pipeline, let’s take a look at the industry’s stock market performance and current valuation.
Industry Versus S&P 500 & Sector
The Zacks Biomedical and Genetics industry is a 698-stock group within the broader Zacks Medical sector. It has underperformed the S&P 500 Composite and the Zacks Medical sector in the past year.
The stocks in this industry fell 11.7% in the past year against the Zacks Medical sector’s 4.2% growth. The S&P 500 Composite has gained 22.2% in the said time frame.
Trailing 12M Price Performance
Industry's Current Valuation
Since most companies in the biotech sector do not have approved drugs, valuing these companies becomes a complex process. On the basis of the trailing 12-month price-to-sales ratio (P/S TTM), which is commonly used for valuing biotech companies with approved portfolios of drugs, the industry is currently trading at 2.47X compared with the S&P 500’s 4.49 and the Zacks Medical sector's 3.27.
Over the last five years, the industry has traded as high as 3.45X, as low as 1.83X and at a median of 2.62X, as the chart below shows.
Price/Sales TTM
5 Biotech Stocks Worth Buying
Puma Biotech’s sole marketed drug, Nerlynx, is performing well with consistent sales performance in the United States in an extremely competitive space. The company has also received additional approvals for using Nerlynx in the extended adjuvant population, which increases the sales potential of the drug. It has also acquired a clinical-stage candidate, alisertib, from Takeda. The successful development of this oncology candidate will strengthen PBYI’s portfolio.
The company currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for 2024 earnings per share has increased 7 cents to 69 cents in the past 90 days. Shares of the company have surged 47.3% in the past year.
Price and Consensus: PBYI
Sarepta’s first Duchenne muscular dystrophy (DMD) drug, Exondys 51, has performed well and should continue its growth trajectory. The company’s two new DMD drugs, Vyondys 53 and Amondys 45, also show strong demand trends. The FDA’s approval of Elevidys (SRP-9001), the first-ever gene therapy for DMD, has been a significant boost for the company with blockbuster potential. The development of Sarepta’s promising next-generation DMD candidate is progressing well and its successful development will strengthen the DMD franchise.
Sarepta currently carries a Zacks Rank #2 (Buy). The bottom-line estimate for 2024 has risen 16 cents in the past 30 days to $2.43. Shares of the company have risen 5.8% in the past year.
Price and Consensus: SRPT
Exelixis’ lead drug, Cabometyx, delivered a strong performance in 2023, driven by its use in combination with Opdivo in the first-line setting for renal cell carcinoma. The drug also posted growth in the hepatocellular carcinoma indication. Management will focus on additional label expansion of Cabometyx in 2024, acceleration of the development of promising pipeline candidates zanzalintinib, XB002 and XL309, and the advancement of other promising preclinical programs into clinical development. The strong performance of Cabometyx and encouraging pipeline progress should help Exelixis maintain its growth trajectory.
The bottom-line estimate for 2024 has moved north 7 cents in the past 30 days to $1.41. The company currently has a Zacks Rank #2. Exelixis’ shares have risen 12.8% in the past year.
Price and Consensus: EXEL
Immunocore is focused on the development of a novel class of T cell receptor (TCR) bispecific immunotherapies, designed to treat a broad range of diseases, including cancer, autoimmune and infectious diseases. The company’s most advanced oncology TCR therapeutic, KIMMTRAK, the world’s first soluble TCR therapy, has been approved for the treatment of adult patients with unresectable or metastatic uveal melanoma in the United States, European Union and many other countries. As of 2023-end, KIMMTRAK was launched in ten countries and approved in 38. The company is pursuing future growth opportunities for KIMMTRAK with two registrational trials in advanced cutaneous melanoma and adjuvant uveal melanoma.
The company is also developing a deep pipeline in multiple therapeutic areas.
Immunocore currently carries a Zacks Rank #2. Loss estimates for 2024 have narrowed to $1.42 from $1.45 in the past 60 days. The stock has risen 17.7% in the past year.
Price and Consensus: IMCR
Editas, a clinical stage genome editing company, has developed a proprietary gene editing platform based on CRISPR technology. Editas is developing its lead candidate, EDIT-301, for treating severe sickle cell disease (SCD) and transfusion-dependent beta thalassemia. The company recently reported positive results from studies of EDIT-301 in these indications. The recent FDA approval of the two gene therapies has boosted the growth potential of this company as well. Editas also inked a deal with Vertex to develop the latter’s new SCD gene therapy, Casgevy.
Loss estimates for 2024 have narrowed to $2.48 from $2.58 in the past 60 days. The company currently has a Zacks Rank #2.
Price and Consensus: EDIT
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