Biotech stocks have been crushed in 2022 along with other growth stocks. YTD, the sector is down 30% which dwarfs the S&P 500’s 22.8% decline.
However, this underperformance is nothing new as biotech stocks have been underperforming for nearly a decade. Since its high in 2015, the iShares Biotechnology ETF (IBB) is down 2.4%, while the S&P 500 is up 110% over the same timeframe.
If we take a look at the earnings reports of the largest biotech stocks over this consolidation period, we will find revenue and earnings growth in the triple-digits, leading to much attractive valuations. In fact, the weighted P/E for the IBB is 14.7 which is less than the S&P 500’s P/E of 21.
In addition to this attractive valuation, underlying fundamentals remain sound for the sector. Over the last couple of decades, healthcare spending has grown at a faster rate than inflation or economic growth. This trend is unlikely to end anytime soon given the aging population and government subsidies through Medicaid and Medicare.
Further, the biotech industry is constantly innovating new treatments and improving upon existing ones. A major development over the past decade is that the cost of drug development has dropped due to software and advances in genomics. Pharmaceutical companies also have an insatiable appetite for promising treatments or companies to keep their pipelines stocked.
With geopolitical risk and economic uncertainty dominating the headlines, biotechs are also intriguing, because they are disconnected from these issues. But, the market turbulence has led to an enticing ‘buy the dip’ opportunity especially with recent signs of outperformance.
Here are 3 biotech stocks that investors should consider buying:
AMGN is a pioneer in biologics and over 80% of AMGN’s revenues come from biologic products. Its 3 top-selling drugs are Enbrel for inflammatory diseases, Prolia for osteoporosis, and Neulasta which reduces infection risk in chemotherapy patients.
These 3 drugs accounted for nearly 50% of AMGN’s sales last year with 74% of sales coming from North America. It’s an opportunity as AMGN’s international sales have been steadily growing, and the company has been making inroads into new markets. It also has a proven record of making successful acquisitions to ensure growth and keep its pipeline well-stocked.
In 2021, AMGN had EPS of $17.1 and revenue of $26 billion. This year, analysts are forecasting a modest improvement to $17.65 in EPS and $26.2 billion in revenue. Out of the 25 Wall Street analysts who cover the stock, none have a Sell rating, while 10 have a Buy or Strong Buy.
AMGN is also a standout in terms of the POWR Ratings with an overall grade of B which equates to a Buy. B-rated stocks have posted an average annual performance of 20.1% which outpaces the S&P 500’s average 8% gain. In terms of its component grades, AMGN has an A for Quality which is consistent with its strong balance sheet, low debt, and well-regarded management team.
BIIB is focused on developing therapies and treatments for neurological and neurodegenerative diseases such as multiple sclerosis, Alzheimer’s, dementia, Parkinson’s disease, and spinal muscular atrophy. These include TECFIDERA, VUMERITY, AVONEX, PLEGRIDY, TYSABRI, and FAMPYRA for multiple sclerosis (MS), SPINRAZA for spinal muscular atrophy, and FUMADERM to treat plaque psoriasis.
Currently, BIIB’s stock price has underperformed following the controversial approval of the drug, Aduhelm, which has failed to generate much traction in the market as there remain questions about its efficacy. So far, insurers and the CMS are not covering it. Last quarter, it only generated $1 million in sales. The drug was also rejected by Japanese and European authorities.
Another challenge for BIIB is that its MS drug, MSTECFIDERA, is now facing generic competition. Last year, it accounted for about 25% of revenue but is expected to see a decline in sales between 30% and 50% this year.
Therefore, the company has been aggressively making deals to bolster its pipeline. Over the last 5 years, it’s made over 20 acquisitions, licensing, or development deals. Last year, BIIB reported $19.22 in EPS and $11.0 billion in revenue. This year, analysts are forecasting a decline to $15.45 in EPS and $9.8 billion in revenue. The stock price seems to have already priced in this deceleration as it’s down 55% from its all-time high in June 2021 following the approval of Aduhelm.
The POWR Ratings are bullish on BIIB as it’s rated a B which translates to a Buy rating. It has strong component grades across the board including an A for Value. Its forward P/E of 13 is significantly cheaper than the S&P 500. It also has a strong balance sheet with minimal debt and nearly $3 billion in cash.
Biogen also has a Quality Grade of B due to being one of the leading companies developing treatments for neurological diseases even with its Aduhelm setback. It also has consistent royalty revenue for many of its franchises including Ocrevus, which saw a 29% increase in the last quarter.
TECH is a supplier and manufacturer of biological materials like high-quality purified proteins and reagents like cytokines, growth factors, and antibodies that are used by pharmaceutical and biotech companies for their drug development and testing processes, specifically for genetic and cellular-based therapies. In addition to this, it also provides instruments and custom manufacturing solutions.
Thus, TECH provides investors with exposure to the genomics industry which is expected to grow at a 19.8% rate over the next decade. As a supplier to the industry, it has less risk than investing in the companies using genomics to develop drugs and bring them to market.
The company has strong earnings momentum as evidenced by its recent earnings report which showed a 17% increase in revenue. GAAP EPS increased from $1.15 to $1.94 per share. It also announced a $400 million share buyback and achieved a milestone with revenues exceeding $1 billion on a trailing twelve-month basis. Operating margins also trended higher to reach 38.6%.
For the full year, analysts are forecasting $7.95 in EPS and $1.1 billion in revenue which would be improvements of 17% and 18%, respectively. Margins are also expected to trend higher with increasing volume. The company has a good mix of slow and steady growth from its older reagent business with strong growth, albeit from a small base, in its genetic and cell therapy products.
As for the POWR Ratings, TECH is rated a Buy. It has a B grade for Sentiment as the Wall Street analyst community is very bullish on the stock with 5 out of 6 having a Buy rating with a consensus price target implying 30% upside. It also has a Quality grade of B due to a strong balance sheet and returning cash to shareholders through dividends and buybacks while staying on a growth trajectory.
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AMGN shares were trading at $242.18 per share on Thursday afternoon, up $2.04 (+0.85%). Year-to-date, AMGN has gained 9.45%, versus a -20.24% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...
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