Biotech Buzz: Which Hot Stocks are the Hidden Gems of the Biotech Sector?

Biotech is the future of modern medicine, so we're looking for the best ways you can bolster your portfolio with these life-changing businesses.

May 22, 2023

Happy Monday, and welcome to another edition of Investing Intel from the team at ValueTheMarkets! As always, the newsletter is packed with stock picks and investing insights we think you’ll enjoy, including:

👉 Three stock tips

👉 Investing signals

👉 Fear & Greed analysis

👉 Key dates for your diary

👉 Investment strategy insights

As you might have gathered by now, we’re getting very excited about biotech this week. But what is it, and how is it different from pharmaceuticals?

Simply put biotech (or biotechnology, to give its full name) involves using living cells to create products such as medical treatments. Examples of this include the use of animal insulin to treat patients with diabetes, or the creation of vaccines using modified genetic material.

So while biotech companies are manipulating living cells, pharmaceutical companies construct medicines from chemical compounds.

Simple!

But we’re not here for a science lesson, we’re here to talk about opportunity. That’s why we’ve picked out three biotech stocks which we think would look great in your portfolio!

The Big Fish - Eli Lilly and Company (NYSE: LLY)

Eli Lilly and Company (NYSE: LLY) is the largest biotech or pharmaceutical stock by market cap.
In Q1 2023, Lilly reported a decrease in revenue by 11% compared to the same period last year, with lower prices for diabetes medications, reduced sales volumes of COVID antibodies, and unfavorable exchange rates contributing to the decline.
However, newer growth products, including Trulicity, Jardiance, Mounjaro, and Verzenio, showed significant sales growth. Mounjaro, which saw its sales more than double to reach $568.5m in Q1, was the standout performer.
Mounjaro's potential for a weight loss indication makes it a crucial growth driver for Lilly. UBS analysts expect the drug to reach annual sales of over $25bn for weight loss if approval is granted by the FDA this year.
Lilly's stock has been trading at a high premium due to Mounjaro's potential, but it may still be undervalued relative to other investments.

The Specialist - Biogen Inc (NASDAQ: BIIB)

Biogen Inc (NASDAQ: BIIB) has a diverse portfolio of approved drugs, including Aduhelm, Spinraza, Tysabri, and Tecfidera.
The company's Leqembi Alzheimer's drug has received accelerated approval from the FDA, which is a promising addition to its drug lineup.
Trial data suggests Leqembi is effective against Alzheimer's disease, and it is estimated to generate over $12bn in revenue in the next five years.
Biogen's financials are strong, with recent revenue contractions offset by lower costs, leading to an increase in net income.
The company has over $6bn in cash and cash equivalents.
Biogen's stock price has already experienced significant growth, with a 10% increase year-to-date and over 50% in the last 12 months. Approval for Leqembi could further boost Biogen's stock price.

Catalyst Pharmaceuticals Inc (NASDAQ: CPRX)

Catalyst Pharmaceuticals Inc (NASDAQ: CPRX) has primarily relied on the success of its drug Firdapse, which accounts for 100% of its earnings and revenue.
Firdapse is the only FDA-approved treatment for Lambert-Eaton Myasthenic Syndrome (LEMS), a rare neurologic disorder. The treatment has orphan drug designation until 2025 and intellectual property protection until 2037.
The company’s potential for growth lies in the unrealized market potential of the drug, with an estimated 2,200 patients yet to be treated, as well as the expansion of its portfolio with Fycompa, an epilepsy treatment.
The business has said it expects revenue to grow by 71% from $214m in FY22 to $383m in FY23.
Additionally, the company has a strong balance sheet, with no debt and a significant cash position. This financial stability allows the company to invest in research and development and provides a cushion against potential setbacks.
Potential risks include market volatility in the biotech sector and the possibility of competition from Teva Pharmaceuticals seeking to market a generic version of Firdapse.

Investing Signals

Biotech Intel

Now it’s time to take a broad look at investing in the biotech industry.

According to Grand View Research, it’s a space which is expected to expand at a compound annual growth rate (CAGR) of 13.96% until 2030 as the industry is buoyed by government support and the increasing popularity of personalized medicine.

Even so, the industry is viewed by many as a volatile place for investment. But is this reputation fair?

As you can see from the below graph, which uses percentage total return in £ with income reinvested, biotech has largely outperformed global markets over the last decade.

But this statistic doesn’t tell the whole story.

For one thing, the NASDAQ Biotechnology Index includes only NASDAQ-listed equities which are subject to some of the strictest corporate governance standards.

Additionally, you can also see from the above graph that the industry is prone to wild moments of growth or deterioration. The same is true on an individual stock basis, as up-and-coming biotech players can find their entire fate resting on the outcome of clinical trials or regulatory moves from the US Food and Drug Administration.

Success can send share prices skyrocketing, but failure can wipe a fledgling business off the map.

This state of play was questioned last year in an article from business and finance academics Vijay Govindarajan, Hassan Ilyas, Felipe B. G. Silva, Anup Srivastava, and Luminita Enache.

Their article states:

“Behind each successful product lie millions of research hours and thousands of synthesized products that never see the light of the day. Out of thousands of synthesized molecules, only few reach what is called Phase 1 success, and just 10% of those receive FDA approval. Even after FDA approval, only a few products are launched in the market, because a launching firm must reassess market potential before spending additional billions of dollars in creating manufacturing, branding, and distribution network.”

This means small players are often left to chance everything on the research stage, before giants like Pfizer (NYSE: PFE) or Merck (NYSE: MRK) jump on successful projects to manufacture, brand, advertise and distribute the resultant products.

As such, the group called for a new model in the funding of grassroots research and likened small biotech outfits to lotteries, with massive potential payoffs but a small chance to succeed. This is a key reason for volatility in the space and a cause for caution when seeking to invest in development-stage biotech outfits.

Top Trending Stocks

Looking more generally at data from the past week, we can see that the top-trending stocks from the period were:

Home Depot Inc (NYSE: HD)
Applied Materials, Inc (NASDAQ: AMAT)
Cisco (NASDAQ: CSCO)
C3.ai (NYSE: AI)
Activision Blizzard (NASDAQ: ATVI)

Home Depot grabbed the top spot as the company reported a major decrease in first-quarter revenues as the inflation squeeze appeared to deter consumers from investing in home renovation.

Applied Materials was also generating chatter courtesy of an earnings update, though the company’s strong revenues and upbeat guidance didn’t translate to upward share price movement on Friday. However, the next-placed Cisco moved in the right direction after beating analyst estimates due to strong hardware sales.

C3.ai rocketed by more than 20% over the course of last week following strong earnings and amid renewed excitement about the artificial intelligence space.

Finally, Activision Blizzard is the talk of the town after its proposed takeover by Microsoft (NASDAQ: MSFT) gained approval from EU and Chinese regulators. It remains unclear whether the $69bn sale will go ahead, with US and UK regulators seeking to block progress, but these two latest decisions will bolster confidence that the deal is not dead.

Fear & Greed

The Fear and Greed Index is a measure of stock market sentiment calculated by CNN Business using seven measures, including market momentum, market volatility, and safe haven demand. It’s meant to shed light on the emotions currently driving the market, giving you insight into how traders are making decisions. Remember, traders are humans, not robots.

As you can see from the graphic below, it appears that greed is continuing to boost stock prices.

The index has been driven marginally higher over the past week by a widening gap between stock and bond performance. Additionally, positive market momentum sending the S&P500 well above its 125-day moving average has played a part in increasing the index.

The impact of these factors has been slightly mitigated by decreasing share price breadth, which indicates that more equities are falling than rising in price.

Dates in the Diary

Monday 22^nd – Eurozone Consumer Confidence Data (May)
Tuesday 23^rd – US New Home Sales Data (Apr) / US PMI Data (Apr) / Canada PPI Data (Apr)
Wednesday 24^th – FOMC Minutes / UK Inflation Data (Apr)
Thursday 25^th – US GDP Data (Q1)
Friday 26^th – US Durable Goods Orders (Apr) / US Income and Spending Data (Apr) / UK Retail Sales Data (Apr)

Investing Strategy Ideas

Dogs of the Dow

Have you ever heard of the Dogs of the Dow strategy?

In 1991, Michael B. O’Higgins’ book, Beating the Dow, outlined a strategy involving investing in the 10 Dow-listed blue-chip stocks with the highest dividend yield from the previous year.

The idea behind this is that blue-chip stocks, being more stable and established, are well-equipped to manage market downturns and so less likely to adjust their dividends. As such, a high dividend yield among this group of stocks could indicate a buying opportunity due to the expectation that the stock price will rebound and the future dividend yield will decrease.

The strategy appeared to work last year, with the stocks outperforming the market significantly and having achieved an average annual total return of 8.7% since the year 2000.

If you want to try out the strategy yourself, the blue-chip stocks with the highest dividend yields from 2022 were:

Verizon (NYSE: VZ) - 6.62%
Dow Inc (NYSE: DOW) - 5.56%
Intel Corporation (NASDAQ: INTC) - 5.52%
Walgreens (NASDAQ: WBA) - 5.14%
3M (NYSE: MMM) - 4.97%
IBM (NYSE: IBM) - 4.68%
Amgen (NASDAQ: AMGN) - 3.24%
Cisco (NASDAQ: CSCO) - 3.19%
Chevron (NYSE: CVX) - 3.16%
JPMorgan Chase (NYSE: JPM) - 2.98%

However, you might want to wait until January to pick up 2024’s ‘Dogs of the Dow’ and get a full year out of the stocks!

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Until Next Time!

Many thanks for taking the time to read Investing Intel today. We hope you’ve enjoyed our insights and are looking forward to more in the week ahead.

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Catch you next week!

Investing Intel