We are only a quarter of the way through 2016, but it's already been a year that most biotechnology investors would rather forget. The iShares Nasdaq Biotechnology ETF (NASDAQ:IBB), an exchange-traded fund that owns a broad range of biotechnology stocks, has lost more than 22% of its value since Jan. 1 and is down more than 35% from its 52-week high.
When an entire industry is sold off hard like that, it can be a great time to go on a shopping spree and build a position in some of the top names from the group. Let's take a closer look at three of the top growth stocks from the sector to see if we can ascertain which of them is the best buy for growth-focused investors today.
1. Alexion Pharmaceuticals (NASDAQ:ALXN)
Rare disease-focused Alexion Pharmaceuticals has been a stellar long-term investment thanks to the huge success of Soliris, the company's extremely expensive drug that is currently approved to treat two very rare diseases. Soliris grew a strong 15% in the most recent quarter and will be reporting on a pair of late-stage clinical trials later this year that could expand Soliris' labeling to two new indications.
Beyond Soliris, Alexion is in the process of launching two new drugs that could help turbocharge its growth rate in the coming years: Strensiq for hypophosphatasia, an ultra-rare metabolic disease that causes defective bone mineralization, and Kanuma for lysosomal acid lipse deficiency, a genetic disease that causes excessive lipids to accumulate in the organs. Both of these drugs have been cleared for sale in the U.S. and the European Union, and analysts estimate that, combined, these drugs could generate peak sales north of $1.5 billion.
In total, analysts believe that Alexion will be able to grow by more than 20% annually for the next five years.
2. Regeneron Pharmaceuticals (NASDAQ:REGN)
Regeneron has grown into a $41 billion biotech largely on the back of the huge success of Eylea, which treats wet age-related macular degeneration and diabetic macular edema. Sales of Eylea jumped 54% in the U.S. to $2.6 billion, and the company recognized another $467 million in profit from overseas sales in 2015. Both numbers should continue to grow strong in the year ahead.
Regeneron is also in the process of launching next-generation cholesterol-lowering drug Praluent, which is staring down a massive market opportunity. While the ramp-up for Praluent has been slower than expected, sales should grow quickly as reimbursement issues are worked out.
Right behind Praluent, the company has two potential blockbuster drugs that could find their way to market in the next two years. Sarilumab, a treatment for rheumatoid arthritis, is currently in the Food and Drug Administration's hands and has a PDUFA date of Oct. 30, 2016. Late-stage trials for dupilumab, a treatment for atopic dermatitis and asthma, are currently in progress. If all goes well, the drug could be in regulators' hands by the end of the year.
Add it all up and Regeneron could have four potential blockbuster drugs on the market in the next two years, which is why analysts are projecting that this company will put up growth of more than 19% annually for the next five years.
3. Vertex Pharmaceuticals
Finally, we have Vertex Pharmaceuticals, a biotechnology company that has become a leader in treating cystic fibrosis, or CF. Vertex's revenue has been growing fast thanks to Kalydeco, one of its two approved CF treatments, whose sales grew 36% in 2015 to $632 million. The drug grabbed several recent label expansion claims last year that expanded its addressable market.
Vertex also recently launched a new CF drug called Orkambi. Orkambi enjoys a wider labeling claim than Kalydeco, so it has gotten off to a very fast start. Sales of Orkambi hit $220 million in its second quarter on the market -- and it hasn't even been launched for sale in Europe or Canada yet, despite having regulatory approval in both regions.
Vertex also continues to invest in new CF treatments. Next-generation drug VX-661 is currently in phase 3 trials as a combination therapy with Kalydeco.
Between its promising pipeline and the continued rollout of Orkambi and Kalydeco, analysts project that the company will grow north of 58% annually over the next five years, which makes it the fastest-growing of the group.
Sizing up their valuations
|Company||Trailing P/E Ratio||Forward P/E Ratio|
As this chart shows, the market has assigned a premium price tag to all three of these companies. Each of them sports a trailing and forward P/E ratio (based on adjusted earnings) that is well above that of S&P 500. That premium appears to be warranted given that these companies are positioned for fast growth over the next few years.
Investors might find it challenging to use the trailing P/E ratio to help them determine which one of these stocks is the best value right now since Vertex was not profitable in 2015. For that reason I prefer to look at each company's forward P/E ratio, which uses the estimated adjusted earnings for the year ahead in the denominator. Doing so indicates that Alexion's stock boasts the most modest valuation of the group while it hints that Vertex's stock is currently the most expensive.
Which is the best buy?
While I firmly believe that there are plenty of reasons to be bullish on all three of these companies for the long term, I personally think that Alexion Pharmaceuticals is the top choice among this cohort as it offers up a nice combination of fast expected growth and it trades at a relative discount to its peers. That makes for a nice combination that growth-focused investors with a strong stomach for risk might want to take advantage of.