Biotech companies have been among the market's best-performing stocks, and that means many of the industry's top stocks have soared to lofty levels that might have kept investors on the sidelines. Since sliding markets are likely to take biotech stocks lower, investors could soon have their first chance in a long time to buy into some great companies at a discount. If so, here are three of my favorite picks.
No. 1: Celgene Corp. (NASDAQ:CELG)
Top selling medicines? Check.
Rock-solid balance sheet? Check.
Promising pipeline of therapies? Check.
When it comes to investing in biotech stocks, those are three of my primary considerations, and arguably no biotech stock passes these tests better than Celgene.
The company's $5 billion-a-year Revlimid and fast-growing Pomalyst make it the market-share leading maker of multiple myeloma drugs. Celgene also has a top-selling pancreatic cancer drug in Abraxane and a promising new psoriasis drug in Otezla.
Thanks in large part to these drugs' expected continued success, Celgene anticipates doubling its revenue in the coming five years. If that proves the case, then Celgene should also deliver impressive bottom-line growth. Earnings per share should reach about $7.50 in 2017, according to management, which would be up considerably from the $4.60 to $4.75 it hopes to report this year.
Looking further ahead, a deep pipeline of internal candidates across cancer and autoimmune disease and a slate of collaboration deals with promising emerging biotech companies including Agios Pharmaceuticals and bluebird bio could provide a steady stream of cutting-edge therapies to power sales in the coming decade.
No. 2 Gilead Sciences (NASDAQ:GILD)
In addition to a great lineup of blockbuster HIV and hepatitis C drugs, Gilead Sciences has the advantage of being one of the cheapest stocks in healthcare.
Worries over competitive threats denting the company's sales growth this year have weighed down shares over the past few months, but those worries might underestimate the long-haul opportunity Gilead Sciences offers investors.
Despite competitive headwinds, the company expects sales to climb 4.4% to 8.4% this year, to between $26 billion and $27 billion. That should allow the company to deliver solid EPS growth. Analysts believe Gilead Sciences' EPS will grow from $8.09 last year, to $9.53 in 2015, to $10.36 next year.
That's solid growth for a company that doubled sales last year thanks to the launch of new HCV drugs Sovaldi and Harvoni, but what makes Gilead Sciences really compelling is its valuation.
Since Wall Street analysts think Gilead's EPS could hit $10.36 next year, investors could be paying less than 10 times forward earnings per share to own the stock. That valuation is even more compelling when we consider that Gilead Sciences is one of the few dividend-paying biotech stocks that investors can buy. Granted, its dividend yield of 1.7% isn't as high as that of some Big Pharma stocks, but given that Gilead Sciences sports more than $10 billion in cash on its balance sheet, there's plenty of firepower for future dividend increases.
No. 3 Biogen (NASDAQ:BIIB)
Similar to Celgene and Gilead Sciences, Biogen is a market dominator. The company's Avonex, Tysabri, and Tecfidera rack up billions of dollars in sales every year for treatment of multiple sclerosis. And with Plegridy and other new treatments, the company is unlikely to lose its leadership in the indication anytime soon.
With Avonex, Tysabri, and Tecfidera sales totaling $7.9 billion in 2014, they're going to continue to have the biggest impact on the company. However, Biogen is working hard to diversify into other indications.
Biogen last year launched two hemophilia drugs, Eloctate and Alprolix, which are beginning to contribute meaningfully to sales.
Thanks to a longer half life that means fewer weekly doses, sales of these two drugs climbed 64% from the third and fourth quarter, to $77.1 million. Since the market for hemophilia drugs is worth $7 billion, and these two drugs are growing quickly, I would not be shocked to see combined sales of Eloctate and Alprolix peak at $500 million or more.
In the meantime, investors can rest easy at night knowing Biogen's earnings grew 54% to $13.83 last year. For 2015, Biogen forecast year-over-year sales growth between 14% and 16%. It also believes EPS will climb to between $16.60 and $17.
Further out, Biogen's pipeline could deliver a steady stream of other new drugs. In December, the company reported solid early stage efficacy for its Alzheimer's drug BIIB037 that has Biogen planning on skipping midstage trials and heading straight into phase 3 studies. If BIIB037 succeeds there, it could become a blockbuster given the significant unmet need for new Alzheimer's therapies.
Tying it together
Biotech stocks are known for their extreme pop-and-drop nature, which means they're best suited for those who don't mind the risk of patent expiration or pipeline failure. For risk-tolerant investors, an increasingly older and insured population is likely to provide industry tailwinds for years to come. Since Celgene, Gilead Sciences, and Biogen Idec have already proven they can successfully reward investors with profit-friendly blockbuster drugs, using any weakness tied to a market dip to buy into these companies could be a savvy move for long-term investors.