Safety isn't guaranteed with biotech stocks. Between the risks inherent in pioneering new medicines and technologies and the business risks faced by all companies, there's little refuge for cautious investors in the industry. Still, some biomedical companies are safer than others, thanks to their more conservative business models. Every company needs the right materials and facilities to function, and biotechs are no exception.
Selling these products to companies in the industry is thus much safer than directly participating in the drug or technology development process. Let's take a look at a pair of companies that are making money by sitting upstream of riskier biotechs.
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1. Alexandria Real Estate
Alexandria Real Estate Equities (ARE 0.78%) is a real estate investment trust (REIT) that specializes exclusively in leasing out laboratory space to biotechs and academic research institutes. Alexandria's customers are a who's who of heavyweights in biopharma. In 2020, tenants like Pfizer, Moderna, Novavax, AstraZeneca, and Johnson & Johnson worked nonstop at its facilities to develop coronavirus vaccines. Coronavirus therapy makers like Vir Biotechnology, AbbVie, and Merck are also among the company's many tenants. In total, 55% of its annual recurring revenue is derived from publicly traded tenants with large market capitalizations.
Alexandria's business model means that its tenants are taking the risks, not investors. In fact, its income is so stable that in 2020 its credit rating was in the top 10% of all publicly traded REITs. While quarterly revenue growth is on the slow side for the industry, at around 9.1% year over year, it's shockingly consistent thanks in part to an occupancy rate of 94.5% and built-in rent increases over time.
Consistent cash flow is another of Alexandria's strengths. Because its income is highly recurring, management rewards investors by paying a quarterly dividend. Right now, Alexandria's stock has a dividend yield of about 2.4%. Over the last 10 years, the dividend payment has increased by more than 142%. So, while that probably won't get you rich anytime soon, it's still another factor in favor of owning the stock.
2. Abcam
Abcam (ABC) (ABCM) makes the laboratory antibody products that biomedical researchers and drug developers need to do their jobs. While you've probably never heard of the company before, rest assured that everyone in biotech has. According to management, "more than 50% of all life-sciences publications cited using an Abcam product," more than any other company. And more than 98% of customers report that they are satisfied with the company's products. In other words, as long as people are tinkering in life-sciences laboratories, they'll gladly seek Abcam's help.
From 2014 to 2020, its global revenue grew by a compound annual growth rate of 13%, which isn't half bad. In the first half of 2021, total revenue only grew by 6.7% year over year, due in part to the pandemic's negative impact on research activity not related to the novel coronavirus.
Moving forward, the company hopes to expand its penetration of the Chinese life-sciences market. But what makes it a safer stock than any other biomedical reagent company? In short, Abcam's customer mix is split between private companies and academic institutions and research labs. So, if there's some sort of biotech recession, it can still depend on its other customers to survive.
Abcam is also a safe bet because it seems to be taking revenue from its competition over time. Since 2010, Abcam's number of citations in research papers has increased by 13%, while its next five competitors have seen their citation volume shrink by 15%. Researchers need to cite the products that they use, so this is a favorable sign. Plus, it points to the most important thing about this stock: Selling research tools is nowhere near as risky as doing research firsthand.
In sum, Abcam -- like Alexandra Real Estate Equities -- is a great option for investors seeking exposure to the growth of the biotech sector, but who don't want to take on the steep risks of buying stock in a drug developer.
