The "Magnificent Seven," a group of market-leading tech companies, is so named for several reasons. Here are three: First, they've all delivered outsized returns over the past decade or so. Second, all seven are leaders in their respective niches of the tech sector. Third, they generally boast excellent growth prospects.
Now, suppose we wanted to create a "Magnificent Seven" list in the biotech industry. Which companies would make the cut? I have no doubt that the following three drugmakers would feature prominently: Vertex Pharmaceuticals (VRTX -0.06%), Eli Lilly (LLY 1.19%), and Novo Nordisk (NVO 0.84%).
VRTX Total Return Level data by YCharts.
Above-average historical returns
As the graph above shows, the worst-performing stock of these three biotech leaders over the past decade is Vertex Pharmaceuticals, with a compound annual growth rate (CAGR) of 17.7%.
Eli Lilly's CAGR of 32.1% is the best, while Novo Nordisk's 20.2% annual return comes in second. In the same period, the biotech industry -- as measured by the SPDR S&P Biotech ETF, an index fund tracking it -- delivered a CAGR of 5.5%, nowhere close to the performance of those three biotech giants. Even the S&P 500's 12.8% falls far short of the worst-performing among our biotech trio.
So, Vertex, Eli Lilly, and Novo Nordisk meet the first requirement of a Magnificent Seven of biotech stocks.
Leaders in core therapeutic areas
Vertex, Lilly, and Novo Nordisk all dominate their most important markets.
Let's start with Vertex. The company's success over the past 10 years is due to its dominance in the market for therapies for cystic fibrosis (CF). No other company in the world sells medicines that treat the underlying conditions of this rare disease, which affects patients' internal organs, and it's not like Vertex's competitors haven't tried. Vertex has a monopoly that grants it substantial pricing power.
The biotech has also been able to develop newer and better CF medicines. In 2019, Vertex earned approval for Trikafta, a drug that can treat up to 90% of CF patients. The biotech is still working on improving its CF lineup. It recently reported results from a phase 3 study for its next combo treatment, which, among other things, comes with a convenient once-daily dosing (Trikafta is taken twice a day). In short, Vertex's dominance here is far from over.
Turning to Eli Lilly and Novo Nordisk, the duo have long competed in the market for diabetes therapies, where they are the two leading players. More recently, Lilly and Novo Nordisk have become famous for their anti-obesity medicines. Novo Nordisk's Ozempic is likely the most famous of the bunch, but Eli Lilly earned approval for Zepbound last year, which proved even more effective than Ozempic. Still, both medicines should increase their sales rapidly in the coming years.
Their growth prospects are exciting
Let's now consider what the future holds for these three biotech leaders. Vertex has sought to diversify its lineup, and succeeded. It recently earned approval for a gene-editing therapy called Casgevy that treats the blood disorders sickle cell disease (SCD) and beta-thalassemia.
Vertex also recorded positive results from a phase 3 study of VX-548, a potential treatment for acute neuropathic pain. The company has several other mid- and late-stage pipeline programs, so it should be able to continue delivering rapidly growing revenue and earnings.
Meanwhile, Eli Lilly and Novo Nordisk will benefit from the fast-growing market for anti-obesity drugs. Some analysts think this niche will hit sales of about $44 billion by 2030, up from $2.5 billion in 2022.
Ozempic and Zepbound should earn key label expansions in other areas, too. Both are targeting the potentially highly lucrative nonalcoholic steatohepatitis market. The former recorded excellent results in treating kidney disease in diabetes patients, while the latter is also being investigated in obstructive sleep apnea.
Furthermore, Eli Lilly's lineup and pipeline include important medicines in other areas, including cancer drug Verzenio, immunosuppressant Taltz, and donanemab, which could earn the green light this year in treating Alzheimer's disease (AD). Novo Nordisk is expanding its lineup, too, with programs for SCD, AD, and various rare diseases; it's also close to an approval for icodec, a once-weekly insulin product.
So all three of these biotechs seem to have excellent outlooks. That's why the market continues to reward them. There is no official "Magnificent Seven" for biotech stocks yet. But if there were, it would be hard to come up with a better trio to lead the pack. Vertex Pharmaceuticals, Eli Lilly, and Novo Nordisk are absolute no-brainers for biotech investors.
