When looking for compelling stocks with significant long-term growth potential, investors will often turn to biotechs. A biotech is any company that uses technology involving living organisms to create medical or agricultural products. The S&P Biotechnology Select Industry Index, the biotech section of the index, gained 18% over the last ten years. Many analysts and financial bloggers believe that this trend will persist. But how do investors know which biotech stocks are ready to grow?
As investors, we look at a combination of factors rather than a single metric to make the most informed decisions. These factors can include analyst ratings, insider activity, news sentiment and financial blogger opinions. The Smart Score metric weighs these factors and combines them into a single numerical score with 10 being the highest.
Here are 3 biotech stocks that scored a “Perfect 10”.
Gilead Sciences, Inc. (GILD)
GILD researches, develops and commercializes antiviral drugs primarily used for the treatment of HIV, hepatitis B, hepatitis C and influenza.
The company will report its Q2 2019 earnings on July 30. According to recent consensus estimates, it is expected to see a 2% dip in revenue from the prior-year quarter to $5.5 billion. EPS is expected to be $6.90, up 4% year-over-year. While the revenue projection is worrisome, the company has made significant efforts to pull off a turnaround.
On March 28, Gilead and its partner, Galapagos NV (GLPG), announced positive results from its phase 3 clinical study testing its filgotinib drug to treat rheumatoid arthritis. The study demonstrated the drug’s improved efficacy when compared to other treatment options. The company announced on July 15 that it will invest $5.1 billion to increase its stake in Galapagos. This will allow both companies to research and bring new treatments to the market over the next ten years.
The company also announced on July 19 that it would be licensing three preclinical programs from its competitor, Novartis AG (NVS). The deal gives GILD exclusive rights to develop and create commercial treatments using several small molecules that have the potential to treat human rhinovirus, influenza and herpes. As per the terms of the agreement, NVS received an upfront payment for an undisclosed amount, and will potentially get an additional $291 million in milestone payments and royalties on annual net sales.
Top financial blogger, Josh Enomoto writes, “If nothing else, GILD belongs on your list of stocks to buy thanks to its cash position. Even under a challenging environment, Gilead managed nearly $12 billion in operating cash flow last year. The company is more than stable enough to continue supporting its dividend yield, which currently stands at 3.68%.”
Five-star analyst from Wells Fargo, Jim Birchenough, agrees that investors should still pick GILD. On July 15, he upgraded the stock to a Buy and raised his price target from $68 to $88, suggesting 35% upside. “We expect GILD earnings growth to reaccelerate beyond 2020 on continued HIV product growth and on incremental contribution from Galapagos-Partnership programs in fibrosis and inflammation,” he said. The analyst has a 22% average return per rating.
The Street is cautiously optimistic on GILD. The “Perfect 10” stock has a ‘Moderate Buy’ analyst consensus and an $81 average price target, indicating 25% upside potential. It also boasts bullish financial blogger and news sentiment.
Seattle Genetics Inc. (SGEN)
SGEN is the innovative biotech company known for using monoclonal antibody-based therapies to develop treatments for cancer. Share prices have soared 32% year-to-date, with the word on the Street being that there’s more growth to come.
Based on the company’s July 16 earnings release, things are looking good. Its Q2 2019 revenue was up 28% year-over-year to $218 million from the prior-year quarter. Sales of Adcetris, the company’s lymphoma drug, increased 30% year-over-year in the U.S. and Canada. Management attributes this jump to the drug’s improved treatment of peripheral T-cell lymphoma and frontline Hodgkin lymphoma. Its full year guidance is forecasting $610 million to $640 in Adcetris sales. The company also saw royalty revenue surge by 13% year-over-year.
At the beginning of July, SGEN announced it submitted a marketing application to the FDA for a new urothelial cancer treatment with its partner, Astellas Pharma. If the drug is approved, shares could rise even more.
Piper Jaffray analyst, Joseph Catanzaro, agrees with that sentiment. On July 17, he upgraded the stock to a Buy and raised the price target from $64 to $75. “We believe Seattle Genetics' 2019 guidance of $610M-$640M is well within reach while it has the opportunity to report positive data from multiple potential registration trials over the next 12 months,” he said.
Another top analyst, Kennen MacKay, maintained his Buy rating while raising the price target from $79 to $80, suggesting 7% upside. The RBC Capital analyst said on July 17, “The Adcetris beat adds commercial excitement to catalyst rich H2. We conservatively increase FY19 Adcetris sales estimates to the high end of FY19 guide ($610M-$640M) noting high probability of beat/raise in quarters ahead.”
SGEN has a ‘Moderate Buy’ analyst consensus, with 6 Buy ratings vs 4 Holds received over the last three months. It has an average price target of $79, suggesting 4% upside. Financial bloggers and hedge funds are bullish the stock. Over the last quarter, hedge funds have increased their SGEN holdings by 113,000 shares.
Vertex Pharmaceuticals Inc. (VRTX)
The last “Perfect 10” on our list is dedicated to discovering new cystic fibrosis (CF) treatments. CF is a genetic disorder that primarily affects the lungs and causes difficulty breathing. While share prices have only increased 5% year-to-date, the company’s broad product pipeline inspires confidence.
The company controls a majority of the cystic fibrosis market space, as its drugs treat the underlying causes of the genetic disease. VRTX believes that it has only reached half of the patients that could benefit from these treatments. Management believes they can expand their patient base by another 50% through additional treatments for younger patients.
Not to mention VRTX stands to grow its reach even further. The company plans to file a triple-drug combo for FDA approval to help it access more of the market as well as develop therapies for other diseases.
On June 7, VRTX announced that it entered into a definitive agreement worth $245 million to acquire all outstanding shares of gene editing therapies developer Exonics Therapeutics. Exonics’ technology will allow VRTX to offer treatments for other genetic diseases such as Duchenne Muscular Dystrophy (DMD).
Ahead of its July 31 earnings release, the company is expected to deliver gains. According to consensus estimates, revenue could reach $884 billion, up 18% year-over-year. Quarterly EPS should also see an increase of 11%, reaching $1.04 per share.
H.C. Wainwright analyst, Andrew Fein, is optimistic about this biotech. On July 22, he reiterated his Buy rating and price target of $220, suggesting 27% upside. He notes that while the company runs the risk of “failure in further combination clinical studies, failure to achieve peak sales revenue and product competition”, he maintains his bullish thesis.
Top financial blogger, William Meyers writes, “In the past I have usually cautioned about its relatively high stock price and market capitalization compared to other large-cap biotechs, but its pipeline is broad and deep, which is a good sign for long-term investors,” he said.
The Street is bullish on VRTX. The stock boasts a ‘Strong Buy’ analyst consensus and a $215 average price target, suggesting 23% upside. It also has a very bullish sentiment from news outlets, with positive technicals and fundamentals.