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How To Determine The “Best” Biotech?
Biotech is a sector that is constantly innovating and changing. It is also more technical and complex than most, so the public at large is often oblivious to the radical discoveries made to improve health and save lives.
As it is driven by scientific progress, it can be tricky for investors to pick the “winner” or the “best stock.” Today, the main solution for a disease might be replaced by another better treatment in a few years.
So, in this article, we will look at biotech companies with a dominant commercial position, as well as astounding intellectual property, technical expertise, and product pipeline. We can reasonably expect those companies to stay market leaders in their niche for the foreseeable future. Their technological acumen is also likely to create entirely new fields of medicine and cure what was previously incurable.
(Companies are ranked by market cap at the time of the writing of this article)
Amgen is maybe the poster child of success in biotechnology, both for its technological achievement and from an investing point of view. It went from a price of $0.11/share in 1984 to a recent price in the $225-$285/share range in 2022.
Its first achievement was creating the first recombinant human erythropoietin in 1989. It would follow with treatments for rheumatoid arthritis in 1998 and osteoporosis and cancer in 2010 among other protein and biological-base therapeutics.
It currently has a total of 27 approved treatments, treating 11 million patients. Its most quickly growing products (9 products worth $ 10.5B in sales) have grown their sales volume by 16% in 2022.
The company is also routinely acquiring other biotech companies with complementary products to Amgen’s or a promising R&D pipeline.
The company is giving a dividend (recent yield of 3%) and generated $9B of free cash flow in 2022 from $26B of revenues. It also spent $4B in R&D during the same year.
- Steady cash flows and profits.
- A solid reputation among medical professionals.
- A rich portfolio of approved drugs.
- A solid pipeline of products in the late stages of development.
- A culture of successfully acquiring and integrating smaller biotech companies.
All of these factors above make Amgen a steady compounder in the biotech field and a solid choice for conservative investors looking for exposure to the biotech and healthcare sector.
Gilead is the other big biotech success story of the last 30 years. Where Amgen focuses on unique proteins, Gilead is centered around specific therapeutic areas, with a predilection for untreated diseases, mostly in virology at first and then in oncology. An emerging focus is also inflammation, the root cause of many other hard-to-treat diseases.
It currently has 30 approved drugs, with most of them for HIV, Hepatitis, and cancer.
Its pipeline contains 59 clinical trial programs, of which 19 are in phase 3.
The company had great commercial success recently, with its oncology sales growing by 71% year-to-year in 2022. Still, HIV sales make up 3/5th of total sales. Total sales grew by 12% YoY. The company is highly profitable, with $9.1B in net income in 2022.
The company is currently making most of its money from HIV treatments. Successfully growing the oncology department will be key to sustaining growth, with 38/59 trials in the pipeline in this segment. This might be a reasonable assumption since 14 of these oncology trials are either in phase 3 or already approved.
Gilead is a surprisingly “niche” biotech for its market cap, very focused on HIV and, to some extent, oncology. Investors in Gilead might want to understand the dynamic of the HIV drug market as most of the company's ongoing cash flow is tied to it.
Vertex is the leader in Cystic Fibrosis treatment, a deadly genetic disease, with 4 different treatments targeting different patient profiles. For patients who cannot be treated with the current therapy, they have a drug in phase 3 of clinical trials, Vanzacaftor. They are also developing gene therapy for cystic fibrosis using mRNA technology.
They partner with CRISPR Therapeutics to help develop the blood disease gene therapy mentioned above.
They also have their own product in development for Type-1 Diabetes.
Lastly, their VX-548 treatment for acute pain is the last stage of development and might be a new alternative to opioids, without the risk of addiction and fewer side effects.
Vertex's dominance over cystic fibrosis is well established, and its partnership with CRISPR Therapeutic and other innovations should allow it to maintain strong control over this market.
The rest of its pipeline is a little more speculative. The stronger part is type-1 diabetes, as it comes from Vertex's acquisition of ViaCyte and is partially built on another partnership with CRISPR Therapeutics.
Vertex is a more risky bet than other large established biotech, considering its current valuation relies entirely on controlling the cystic fibrosis market. Cystic fibrosis is currently highly profitable, but it might be curable through gene editing in the long run.
Any growth expectation must rely on the success of its painkiller or diabetes R&D effort. Nevertheless, these 2 markets are gigantic and not optimally treated, so that positive results could propel the company to new heights among biotech leaders.
With the explosion of gene therapies and tools for medical researchers in genetics, the demand for machinery in this field is growing extremely rapidly. One day, a full genome sequence will likely be a normal part of everyone’s medical treatment and maybe even done at birth.
This niche market is dominated by just a handful of companies holding a quasi-monopole on this technology.
By far, the leader of the Next-Generation Genomics (NGS) sector, if measured by the number of machines installed and revenues, is Illumina.
This is also a company that we covered previously in this article, comparing it to its smaller competitor, Pacific Bioscience.
It is currently challenged by startups in its home domain of genome sequencing but is likely to stay the dominant player with its new generation of sequencer, NovaSeqX, already sold out. It also owns Grail, a liquid biopsy company that detects cancer early from a blood sample.
Overall, Illumina is a way to play the genomic revolution without looking to pick the winning biotech with the best treatment.
A full genome currently costs $600 with a target of $200 with the recently launched new NovaSeq X. The cheaper genomic gets, the more its market grows, historically confined to research, now in diagnostic, and then as a routine procedure at some point in the future.
Investors will want to be cautious of the fact that the company is not profitable, preferring to spend its cash on improving its technology. So, growth investors are likely to be more comfortable with this stock, which could be compared to Intel in the early 1990s.
By far the most-known biotech company after the Covid-19 pandemic. It is the trailblazer for mRNA vaccine technology and is now expanding quickly.
First, BioNTech works on mRNA vaccines for shingles, tuberculosis, malaria, HIV, and the herpes virus. Only its direct competitor, Moderna (MRNA), is developing more mRNA vaccines than BioNTech.
The next step for BioNTech in maintaining its leadership in mRNA is expanding the technology to new applications. The company has no less than 12 candidate cancer treatment products in its pipeline. It is by far the leader for this potential application, as Moderna has only 2 candidate mRNA treatments for cancer, and Curevac (CVAC) has only 1 candidate.
You can read more about the future of mRNA technology in our article “The Next Application for mRNA Technology: Cancer Therapies”
The success of the COVID-19 vaccine (60% market share worldwide) also provided BioNTech with more than enough funding to expand aggressively without needing extra funding, with $13.9B in cash at the end of 2022.
Despite its larger reputation, BioNTech has the smallest market cap among the top 5 on April 2023. It is currently trading at a P/E just above 3 due to the Covid profit.
Even if this ratio is likely to re-balance with the end of the pandemic, BioNTech is probably a safe bet, considering its stock price also cooled down since the height of the pandemic. When valuing the company, the “blue ocean” strategic potential of expanding mRNA to replace traditional vaccines or treat cancer should also be part of the equation.