It has been a bumpy ride for the biotech industry in 2022 as the uncertainty in the macroeconomic environment put brakes on the momentum witnessed in the initial part of the year. With the risk of yet another outbreak, thanks to the evolving Omicron variant of the COVID-19 virus, coronavirus treatments will continue to be in focus along with new drug approvals and regular pipeline updates. Meanwhile, most companies are looking to bolster their product portfolio through collaborations, buyouts and pipeline development. Given the persistent need for innovative medical treatments, the industry can be a safe haven despite the inherent volatility.
Biotech companies like
Gilead Sciences, Inc
.
GILD
,
GSK plc
.
GSK
,
Immunocore
IMCR
and
Syndax Pharmaceuticals
SNDX
are well-poised to outperform the volatile sector.
Industry Description
The Zacks
Biomedical and Genetics
industry includes biopharmaceutical and biotechnology companies that develop high-profile drugs using path-breaking technology. These biologically processed drugs, which address virology, neuroscience, metabolism and rare diseases, are manufactured using live organisms. As technology becomes paramount to improving global health, the main goal of biotech companies is to use innovative technology to create breakthrough treatments. Quite a few companies in this space are developing vaccines as well using modern technology. Given the dynamic and evolving nature of technology, the sector is perceived to be riskier than the more stable large-cap pharma or drug industry.
4 Trends Shaping the Future of the Biotech Industry
Innovation, Execution Hold the Key
: As only a few companies in this industry have approved drugs in their portfolio, the focus is primarily on the performance of high-profile drugs and pipeline development. Most companies spend millions and billions to create a drug with path-breaking technology, which leads to significant research & development expenditure. Hence, it takes several years before a biotech company turns profitable. Additionally, successful commercialization is key to higher drug uptake, as smaller biotechs generally lack the funds and expertise to reach the targeted population. This, in turn, prompts collaboration deals with either pharma or biotech bigwigs, wherein sales are shared or royalties are received. Moreover, it might take quite a few years for any newly-approved drug to contribute significantly to its company’s top line.
Consolidation to Fight Slowdown
: Consolidation has always taken center stage in the biotech industry. This has been an important trend as leading pharma/biotech companies look to diversify their revenue base in the face of dwindling sales of high-profile drugs. While the scale and pace of M&A activity slowed down last year due to the pandemic, the pace has picked up in 2022 as pharma and pharma/biotech bigwigs are evidently on the lookout to bolster their portfolios. While oncology and immuno-oncology are the key focus areas, treatments for rare diseases and gene-editing companies also hold potential, making them lucrative investment areas. Moreover, companies investing in mRNA technology are gaining a lot of attention, given the success of the technology in developing COVID-19 vaccines. An attractive pipeline candidate is a key lure for these companies. Cost synergies in research and development are an added benefit as quite a few smaller biotech companies are using innovative technologies to develop drugs and treatments.
Opportunities Created by the Pandemic
: Though the onset of the COVID-19 pandemic impacted demand for drugs, it has turned out to be a growth opportunity for companies in the biotech sector to develop innovative treatments for the same. The successful development of treatments in such a short period has resulted in incremental revenues for the companies, which have developed vaccines, antibody treatments and antivirals for this disease. The potential emergence of new variants of the virus should keep the momentum going.
Pipeline Setbacks & Competition
: Pipeline setbacks are a key deterrent for biotech companies, given the exorbitant cost of developing drugs using expensive technology. Most drugs/therapies take years to gain a regulatory nod. An unfavorable outcome from a crucial trial on a promising candidate is a huge setback and particularly for smaller biotechs, which are mostly one-trick ponies. The leading biotechs also face other headwinds, like a decline in the sales of high-profile drugs due to intensifying competition.
Zacks Industry Rank Indicates Bright Prospects
The group’s
Zacks Industry Rank
is basically the average of the Zacks Rank of all the member stocks.
The Zacks Biomedical and Genetics industry currently carries a Zacks Industry Rank #68, which places it among the top 27% of more than 248 Zacks industries, mirroring a bright outlook for the space, probably due to the consistent demand for better medical drugs/treatments. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few biotech stocks that are well-positioned to beat the industry based on a strong portfolio/pipeline, let’s take a look at the industry’s stock market performance and current valuation.
Industry Versus S&P 500 & Sector
The Zacks Biomedical and Genetics industry is a 513-stock group within the broader Zacks Medical sector. It has underperformed the Zacks Medical sector but performed almost in line with the S&P 500 composite in 2022.
While the stocks in this industry have declined 20.5%, the Zacks Medical sector has lost 17.8% and the S&P 500 composite has lost 20.6%.
Industry’s Current Valuation
Since most companies in the biotech sector do not have approved drugs, valuing these companies becomes a complex process. On the basis of the trailing 12-month price-to-sales ratio (P/S TTM), which is commonly used for valuing biotech companies with approved portfolios of drugs, the industry is currently trading at 2.13 compared with the S&P 500’s 3.40 and the Zacks Medical sector’s 2.21.
Over the last five years, the industry has traded as high as 3.37X, as low as 1.70X and at a median of 2.64X, as the chart below shows.
Price/Sales TTM
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4 Biotech Stocks Worth Buying
Clinical-stage biopharmaceutical company
Syndax Pharmaceuticals
is developing an innovative pipeline of cancer therapies. The company’s pipeline includes revumenib (SNDX-5613), a highly selective inhibitor of the Menin–MLL binding interaction, and axatilimab, a monoclonal antibody that blocks the colony stimulating factor 1 (CSF-1) receptor. The pipeline progress has been encouraging. The FDA recently granted Breakthrough Therapy Designation to revumenib for the treatment of adult and pediatric patients with relapsed or refractory acute leukemia harboring a KMT2A rearrangement.
Syndax remains on track to submit a new drug application for revumenib by the end of 2023. Syndax completed enrollment in its pivotal AGAVE-201 trial in chronic graft versus host disease for axatilimab and plans to report top-line results from the study in mid-2023, with a potential biologics license application filing expected to follow by the end of 2023. The company entered into an exclusive worldwide co-development and co-commercialization license agreement with Incyte for axatilimab in 2021.
The Zacks Consensus Estimate for 2022 and 2023 loss has narrowed by 16 cents and 45 cents, respectively, over the past 60 days. Syndax shares have gained 11% in the year so far. The company currently sports a Zacks Rank #1 (Strong Buy).
You can see
the complete list of today’s Zacks #1 Rank stocks here
.
Price and Consensus: SNDX
Gilead’s shares have rallied 16.7% so far in 2022. The consensus earnings estimate for 2022 and 2023 has jumped by 54 cents and 28 cents, respectively, over the past 60 days. Gilead currently carries a Zacks Rank #2 (Buy).
Price and Consensus: GILD
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GSK
has a diverse portfolio with a presence in different geographical areas. GSK is focused on oncology, immuno-inflammation, HIV and respiratory therapeutic areas. GSK’s relatively newer specialty products like Nucala (severe eosinophilic asthma), Bexsero (meningitis vaccine), Shingrix (shingles vaccines), Trelegy Ellipta (three medicines in a single inhaler to treat COPD) and Juluca (dolutegravir+ rilpivirine once-daily, single pill for HIV) have maintained momentum for the company. GSK is also working on expanding the label of marketed products into additional indications like Nucala and has made significant pipeline progress. These efforts should help the company combat generic pressure for key drugs.
GSK currently has a Zacks Rank #2. The consensus earnings estimate for 2022 and 2023 has jumped by 14 cents and 15 cents, respectively, over the past 60 days.
Price and Consensus: GSK
Immunocore
is focused on the development of a novel class of T cell receptor (TCR) bispecific immunotherapies designed to treat a broad range of diseases, including cancer, autoimmune and infectious diseases. The company’s most advanced oncology TCR therapeutic, KIMMTRAK, the world’s first soluble TCR therapy, has been approved for the treatment of adult patients with unresectable or metastatic uveal melanoma in the United States, European Union, and many other countries. The company is also developing a deep pipeline in multiple therapeutic areas, including five clinical-stage programs in oncology and infectious disease, advanced pre-clinical programs in autoimmune disease and multiple earlier pre-clinical programs. KIMMTRAK’s performance has been encouraging and the company continues to add new accounts.
The company recently announced a private investment in public equity financing with four existing investors for net proceeds of $139.6 million, which along with anticipated revenues from KIMMTRAK and cash and cash equivalents on hand, should extend the company’s cash runaway through 2025.
Immunocore currently carries a Zacks Rank #2. Loss estimates for 2022 and 2023 have narrowed 71 cents and 99 cents, respectively, in the past 60 days. The stock has surged 68.1% in the year so far.
Price and Consensus: IMCR
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