Over the last five years, biotech stocks have trounced the performance of the S&P 500. One major reason why is the number of new drugs launched by biotech companies. More diseases than ever before can now be treated. Some of the most problematic diseases of the past can even now be cured.
The good news for investors is that it's not too late to buy several of the top biotech stocks on the market. Five of the very best are AbbVie (ABBV 0.37%), Celgene (CELG), Gilead Sciences (GILD 0.82%), Ligand Pharmaceuticals (LGND 4.30%), and Vertex Pharmaceuticals (VRTX 0.81%). Here's why these are biotech stocks you can buy now and hold for potentially significant returns.
There's so much to like about AbbVie that it's tough to choose where to start. If you like market-beating returns, AbbVie's got them. The company has been the hands-down best big drugmaker over the last three years in total shareholder return and adjusted earnings-per-share growth.
AbbVie achieved this stellar performance primarily due to sales growth for Humira, the world's top-selling drug. Some investors had been worried that biosimilar rivals would snatch away a large chunk of Humira's market share, but thanks to a deal between AbbVie and Amgen, those concerns have diminished greatly.
The future looks bright for the biotech. Cancer drug Imbruvica continues to enjoy strong momentum. AbbVie also claims a deep pipeline, with potential blockbusters like autoimmune disease drug upadacitinib and cancer therapy Rova-T.
Income-seeking investors will also love AbbVie's dividend, which currently yields nearly 3%. The dividend is growing fast as well, with AbbVie boosting its payout by 78% since being spun off from Abbott Labs in 2013.
Celgene is the only major biopharmaceutical company to have topped AbbVie's revenue growth in recent years. And were it not for a big pullback in its stock price over the last couple of months, Celgene would have beaten AbbVie in total shareholder return over the last three years.
This recent decline, however, makes Celgene stock a bona fide biotech bargain. Shares trade at less than 12 times expected earnings. The company expects to increase adjusted earnings per share by 19.5% annually over the next few years. This optimism stems in large part from continued sales growth for blood cancer drugs Revlimid and Pomalyst.
Celgene's pipeline also should produce quite a few winners in the coming years. The biotech thinks that it has nine current pipeline candidates that could generate sales of at least $1 billion annually. Two especially promising drugs are ozanimod, which is in late-stage studies targeting multiple sclerosis and ulcerative colitis, and luspatercept, which is being evaluated in late-stage studies for treating blood disorders beta-thalassemia and myelodysplastic syndromes (MDS).
More drugs could be added to Celgene's arsenal soon. The biotech has proven to be especially adept at finding development partners and making acquisitions that add value for shareholders.
The last couple of years haven't been so great for Gilead Sciences. Sales for the biotech's enormously successful hepatitis C drugs have dropped significantly. So many patients with hepatitis C have been cured that there aren't as many new ones starting treatment.
But Gilead CEO John Milligan believes that the company should see smoother sailing ahead in the hepatitis C market. And hepatitis C isn't the biotech's only area of focus. Gilead remains the dominant player in HIV, with multiple blockbuster drugs. Another one could be on the way soon: The Food and Drug Administration is scheduled to make an approval decision on Gilead's bictegravir/F/TAF combo by Feb. 12, 2018. Milligan predicted that the combo will become "most important product out there" in the HIV market.
Gilead also now stands as one of the leaders in an exciting new area of cancer treatment as the result of its acquisition this year of Kite Pharma. Kite's Yescarta became the second CAR-T (chimeric antigen receptor T cell) drug to win FDA approval in October.
Even with its HIV and CAR-T drugs, though, Gilead still doesn't have the growth prospects right now that the other top biotechs on the list do. The operative words, however, are "right now." Gilead has a huge cash stockpile and continues to generate strong cash flow. Expect more acquisitions to fuel growth. With this potential for game-changing deals and a solid pipeline, Gilead looks like a smart long-term pick in my view.
With a market cap of less than $3 billion, Ligand Pharmaceuticals is tiny compared to AbbVie, Celgene, and Gilead. However, it has a pipeline that would make you think otherwise.
Ligand claims five late-stage programs, 22 mid-stage programs, and 25 early-stage programs. How can a company that's on track to generate revenue in the ballpark of $135 million support such a big pipeline? Partnerships and licensing agreements. Lots of them.
The crown jewels for Ligand are its Captisol and OmniAb platforms, which help other biopharmaceutical companies develop drugs more effectively. Over 95 pharmaceutical companies and biotechs -- truly a "who's who" of the industry -- partner with Ligand on developing drugs. In return, it receives licensing and milestone payments during the development of the drugs, and royalties if the drugs are ultimately commercialized.
Ligand might look expensive at first glance, with its stock trading at 35 times expected earnings. However, there are so many programs in the hopper that Wall Street analysts expect the company to grow earnings by nearly 28% annually over the next five years. That kind of growth makes the current valuation for Ligand much more palatable.
None of the other biotechs mentioned can touch Vertex Pharmaceuticals when it comes to growth prospects. Analysts think that the company will be able to increase its earnings by a whopping 65% annually over the next few years. Is this really possible? I think so.
Vertex's focus is on treating cystic fibrosis. The biotech currently has two CF drugs on the market -- Kalydeco and Orkambi. But the drugs only treat CF patients with certain genetic mutations. These patients make up only a fraction of the total number of CF patients worldwide.
While Orkambi continues to gain momentum, Vertex's real growth opportunities should come from its pipeline candidates. The company expects to receive FDA approval for a combination of tezecaftor and ivacaftor (Kalydeco) by Feb. 28, 2018. Although the combo will likely be successful, it should only be a prelude to even better things for Vertex.
The biotech intends to initiate late-stage studies for triple-drug combos in early 2018. These drugs present the greatest long-term opportunities for Vertex. The company's goal is to accomplish in CF what Gilead Sciences has done in HIV. I think it has a pretty good chance of achieving that goal.
Best biotech stock of all?
I really like all five of the biotech stocks, albeit for different reasons. Which is the best among them? Let's use the process of elimination.
As promising as Ligand and Vertex are, much of their potential lies in their pipelines. And there's always risk with pipeline candidates. Gilead has a lot going for it, but it will still probably be a few years before the company returns to solid growth.
That leaves AbbVie and Celgene. I'd say flip a coin to make the choice. AbbVie has great growth prospects and a terrific dividend. Celgene has even better prospects and is dirt cheap.
The good news is that you don't have to select just one of these biotech stocks. In my view, all of them are smart picks that you can buy right now.