Biotech stocks experienced a massive rally in 2020. The SPDR S&P Biotech ETF (NYSEARCA:XBI) soared over 110% from April 8, 2020, until its high on Feb. 8 of this year. This was more than twice the S&P 500’s gain of 42% over the same period. The industry rose on the excitement of potential Covid-19 treatments and vaccines.
However, since February of this year, shares of biotech companies have underperformed. Many stocks in the industry were stung by setbacks in clinical trials, a rotation away from growth stocks, drug-pricing reforms and delayed drug approvals. But I believe the selloff is overdone, as these factors weighing on the industry are temporary.
The overall bullish growth story for biotech innovations and advancements remains. Traders are starting to agree with me, as XBI has been trending upward over the past couple of trading sessions.
Investors are starting to realize that while Covid-19 is improving in the United States, there are still parts of the world, such as India, plagued by the virus. This means eyes are back on biotech companies, as the pandemic not only brought attention to companies working on vaccines but also biotechs that were not.
That is why I am recommending Gilead Sciences (NASDAQ:GILD) and Vertex Pharmaceuticals (NASDAQ:VRTX), two biotech firms I believe will see their shares rise in the months ahead.
Gilead Sciences (GILD)
GILD develops and markets therapies to treat life-threatening infectious diseases. The firm specializes in HIV and hepatitis B and C. While it has been a pioneer in developing drugs for the treatment of HIV, it also develops treatments for liver diseases, hematology and oncology diseases, and inflammation and respiratory diseases.
The company was granted full approval by the FDA to use Veklury (remdesivir) to treat patients with Covid-19. GILD announced late Monday that it would assist local manufacturers in producing the drug and immediately send 450,000 vials to India. The company generated $2.8 billion in sales of the drug last year.
GILD can generate high profit margins with its HIV and hepatitis C portfolio, as these drugs only require a small salesforce and inexpensive manufacturing. It actually offers several single-table treatments for HIV. Plus, its next-generation offerings, Genvoya and Biktarvym, are helping to grow market share.
GILD is also building a pipeline of drugs outside of HIV and hepatitis through acquisitions. In fact, it is shifting its focus towards oncology, as its breast cancer and urothelial cancer drug Trodelvy has a strong potential for indication expansion. GILD has an overall grade of B, which translates into a Buy rating in our POWR Ratings system. The company has a Growth Grade of B, which isn’t surprising as Wall Street analysts forecast over 20% revenue growth in its upcoming quarterly earnings release.
GILD also has a Value Grade of A based on its low valuation. The stock has a paltry forward P/E of 9.91 and a price-to-free-cash flow of 10.8, which is well below the industry average. We also provide grades for GILD based on Momentum, Stability, Sentiment, and Quality. You can find those here. GILD is ranked No. 5 in the Biotech industry. For other top drugs in the industry.
Vertex Pharmaceuticals (VRTX)
VRTX discovers and develops small-molecule drugs to treat serious diseases. Its specialty is in cystic fibrosis, where its therapies remain the global standard of care. Its key cystic fibrosis drugs are Kalydeco, Orkambi, Symdeko, and Trikafta. The company also focuses on treatments for inflammatory diseases, influenza, pain, type 1 diabetes and other rare diseases.
The company’s leading cystic fibrosis drugs are collectively approved to treat approximately half of the 80,000 plus people with cystic fibrosis in North America, Europe, and Australia. Trikafta, especially, has the potential to treat up to 90% of cystic fibrosis patients. These drugs are poised to continue dominating the market due to their disease-modifying potential, consistent use by patients and very little competition.
These drugs also have lengthy patents, which protect against generics. VRTX’s non-cystic fibrosis pipeline is also impressive. The company has been looking into areas such as AAT deficiency, sickle cell disease, and beta-thalassemia. For instance, VRTX has been co-developing a gene-editing treatment in partnership with CRISPR Therapeutics targeting sickle cell disease and thalassemia. The company even recently announced it’s buying the majority rights to gene-editing therapy.
VRTX has an overall grade of B, which is a Buy rating in our POWR Ratings service. The company has a Value Grade of A as its stock is trading at an attractive valuation. Its forward P/E is below 20, and its EV/EBITDA is below the industry average. The stock is also trading 30% below its average analyst target, indicating a substantial potential upside.
The company also has a Quality Grade of A, which indicates a strong balance sheet. VRTX has a very high current ratio of 4.3, which suggests the company has more than enough liquidity to handle short-term needs. VRTX also has robust efficiency metrics as both its return on equity and return on invested capital are over 30%. To see the rest of VRTX’s grades (Growth, Momentum, Stability, and sentiment), click here. VRTX is ranked #17 in the Biotech industry.