Investing in biotech stocks comes with its own set of rules. Some people think biotech stocks are too risky. Not me. In my view, the potential for returns more than compensates for the risks -- with the right biotechs, at least.
I liked biotech stocks in 2017, and I still like them now that a new year has begun. Here are 18 reasons I continue to think biotech stocks are smart picks in 2018.
1. Solid momentum from 2017
The Nasdaq Biotechnology Index jumped more than 21% in 2017. That's solid momentum that I suspect will continue. And despite the nice gains, biotech stocks as a group have pulled back over the last couple of months from their 52-week highs set in early October.
2. There are still bargains to be found
Even with many biotech stocks enjoying solid returns last year, there are still bargains to be found. Gilead Sciences (NASDAQ:GILD), for example, trades at less than 11 times expected earnings. Celgene's (NASDAQ:CELG) forward earnings multiple is a little over 12, with the stock looking even more attractively valued considering the biotech's growth prospects.
3. Tax reform means higher earnings
Whether you personally love or hate the GOP's tax cuts, it should be good news for many U.S. biotechs. With the corporate tax rate lowered from 35% to 21% beginning in 2018, that should mean improved earnings for many companies in the industry. And higher earnings often translates to higher share prices.
4. Some are likely to make acquisitions
2017 was a relatively quiet year for biotech mergers and acquisitions. I expect more activity this year, thanks in large part to the aforementioned corporate tax reform. Which big biotechs are likely to make deals? Just throw a dart at a list of biotech stocks with market caps of $30 billion or more. Chances are that you'll hit one that could make a significant acquisition in 2018.
5. Some are likely to be acquired
While acquisitions could provide a boost to big biotech stocks like Gilead, they could mean enormous returns for smaller biotechs finding themselves as targets for the larger players. There are quite a few that I think could be in the cross-hairs. In particular, I suspect Madrigal Pharmaceuticals (NASDAQ:MDGL) could attract considerable interest. Madrigal announced promising phase 2 results in December for MGL-3196 in treating non-alcoholic steatohepatitis, a potentially lucrative indication on which several huge drugmakers have already invested heavily.
6. Solid growth prospects for many existing drugs
Many of the biggest drugs of 2017 will be even more successful this year. AbbVie (NYSE:ABBV) is on track to make $18 billion from top-selling Humira for 2017. I expect Humira will rake in close to $20 billion this year. Celgene's Revlimid, the No. 2 best-selling drug last year, appears likely to increase sales to more than $9 billion -- another double-digit percentage year-over-year increase.
7. Great new products on the way
Several biotechs should launch drugs in 2018 that could become the biggest blockbusters of the future. Probably the most exciting launch of all is Gilead's bictegravir/F/TAF combo. An approval decision from the FDA is expected by February for the HIV therapy. If approved as expected, Gilead could make $5 billion annually from bictegravir/F/TAF by 2022.
8. Tremendous pipeline potential
Even more exciting is the pipeline potential for biotechs. For example, there are nearly 2,000 cancer immunotherapies in clinical or pre-clinical testing. And that's just one area. Ligand Pharmaceuticals (NASDAQ:LGND) could be a poster child of pipeline potential. The biotech claims a market cap of less than $3 billion but has a pipeline including dozens of drugs across multiple indications using its technologies.
9. Lots of cash for the big players
While gravitational forces make the world go 'round, cash is pretty important for doing the same thing for biotech stocks. I like that many big biotechs are currently sitting on lots of cash and could have even more thanks to tax reform. What I like even better is what the companies could do with that cash, including buybacks, acquisitions (see point No. 4), and, for a select few, paying dividends.
10. Surprisingly strong dividends available
That leads me to the next reason I like some biotech stocks -- their dividends. Two that have already been mentioned, AbbVie and Gilead Sciences, pay excellent dividends. AbbVie's yield currently stands just under 3%, while Gilead's dividend yields only a little less at 2.9%.
11. Drug pricing changes: all talk and no action
Investors have been anxious at times over the past couple of years about the prospects for major drug pricing changes by the U.S. government, which caused biotech stock prices to drop. I'm not too worried about drastic changes in 2018, though. My hunch is that there will be a lot more talk than action on drug pricing this year.
12. A better, faster FDA
I do think the FDA deserves an "attaboy." New FDA chief Scott Gottlieb has hinted at more flexibility in approving drugs quickly by methods such as using data from smaller and faster clinical trials. That should be a good thing for many biotech stocks in 2018 and beyond.
13. They help sick people
Sometimes we can get lost in the minutiae of investing and miss the big picture. The big picture is that there are still a lot of sick people throughout the world who need prescription medications. I like owning a piece of a company that makes a positive difference -- and, despite some controversies over pricing and other matters, biotechs make a positive difference for many people. Just ask patients who have been cured of hepatitis C by Gilead's drugs or patients whose cancer went into remission because of new immunotherapies.
14. There will be even more sick people
Returning to the colder, harder investing focus, the reality is that even with more effective therapies there will be more sick people in 2018 than there were last year. And there will be more in coming years with aging populations in the U.S. and across the globe. That translates to increased demand for biotechs.
15. They're more stable than bitcoin
You'll sometimes hear about how volatile biotech stocks are. And they can be quite volatile. But I think over the long run, in aggregate, they'll be less volatile and more stable than cryptocurrencies like bitcoin.
16. Several lower-risk ways to invest
Some might challenge the previous point by noting individual biotech stocks that have exhibited significantly more volatility than bitcoin. However, another reason I like biotech stocks is that there are several lower-risk alternatives for investing in them. I'm speaking, of course, about biotech ETFs. My favorite right now is the SPDR S&P Biotech ETF, but there are other top biotech ETFs to consider as well.
17. I write about them
I don't like biotech stocks just because I write about them, but I do write about them because I like them. Biotech is a fascinating world to me. Investing in biotech stocks is even more intriguing. So even if I didn't have a penny to invest, I'd still like biotech stocks.
18. They've made me lots of money in the past -- and should continue to do so
Finally, the clincher: I like biotech stocks for 2018 because they've made plenty of money for me in the past -- and I expect to make plenty more this year and in the future. One of my top winners from 2017 was AbbVie, which generated a total return of 60%. The SPDR S&P Biotech ETF generated a return of more than 40% for me last year. Even Celgene (which fell nearly 10% in 2017 -- my biggest loser) has still generated nice returns since I bought the stock a few years ago. Not every biotech stock will be a winner, of course. I think that biotech stocks in general, though, will perform well in 2018 and over the long run. That's the best reason of all to like them.
Keith Speights owns shares of AbbVie, Celgene, Gilead Sciences, and SPDR S&P Biotech. The Motley Fool owns shares of and recommends Celgene and Gilead Sciences. The Motley Fool has a disclosure policy.