With the pandemic largely in control, thanks to the rollout of vaccines in record time, the biotech sector’s focus has shifted to new drug approvals, label expansion of existing drugs and acquisitions. While the emergence of new variants of COVID-19 in the upcoming winter season will keep the biotech and pharma sector on tenterhooks, most companies are looking to bolster their product portfolio through collaborations, buyouts and pipeline development. Biotech companies like Agenus Inc. AGEN, CureVac N.V. CVAC, Dynavax DVAX and Immunocore IMCR are well-poised to outperform the volatile sector on a solid portfolio and encouraging pipeline progress.
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 these 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 of late as pharma and biotech bigwigs like Novartis and Gilead, among others, 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 promise 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, and 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 COVID-19. The successful development of treatments in such a short period has resulted in massive incremental revenues for these 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 Encouraging 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 #77, which places it among the top 31% of more than 251 Zacks industries, mirroring a bright outlook for the space, probably due to the economic recovery and business getting back to normal. 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 719-stock group within the broader Zacks Medical sector. It has underperformed the S&P 500 Index and the Zacks Medical sector in the year so far.
While the stocks in this industry have declined 28.9%, both the Zacks Medical sector and S&P 500 composite have lost 25%.
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 1.77 compared with the S&P 500’s 3.36 and the Zacks Medical sector's 1.89.
Over the last five years, the industry has traded as high as 3.34X, as low as 1.66X and at a median of 2.64X, as the chart below shows.
4 Biotech Stocks Worth to Keep an Eye on
Agenus, a clinical-stage immuno-oncology company, is advancing an extensive pipeline of immune checkpoint antibodies, adoptive cell therapies and neoantigen vaccines to fight cancer. Its lead program, botensilimab (AGEN1181), is being evaluated in multiple clinical programs. Earlier in the month, Agenus initiated a global phase II program of botensilimab, which included ACTIVATE-Colorectal, a phase II study designed to evaluate botensilimab as monotherapy and in combination with balstilimab (anti-PD-1) for the treatment of microsatellite stable colorectal cancer (MSS CRC), and ACTIVATE-Melanoma, a phase II study designed to evaluate botensilimab as a single agent for advanced melanoma, refractory to either prior anti-PD-1 or combined anti-PD-1/anti-CTLA-4 therapy. In addition, a phase II study in pancreatic cancer is expected to begin later in 2022. The successful development will be a significant boost for Agenus as this space has immense potential. The company has also forged alliances with bigwigs like Bristol-Myers Squibb Company and Gilead Sciences, Inc., among others.
The consensus loss estimate for 2022 earnings has narrowed to 70 cents from 89 cents over the past 60 days. Agenus 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: AGEN
CureVac is developing a new class of transformative medicines based on messenger ribonucleic acid (mRNA). It has collaborated with Glaxo to jointly develop new products in prophylactic vaccines for infectious diseases based on the former’s second-generation mRNA technology. Both companies extended the collaboration to develop second-generation COVID-19 vaccine candidates and modify mRNA vaccine technologies. While its first first-generation vaccine candidate, CVnCoV, was not successful, it is now focusing on the second-generation mRNA-based vaccines against a range of relevant infectious diseases.
The consensus loss estimate for 2022 earnings has narrowed to $1.59 from $2 over the past 60 days. The company currently has a Zacks Rank #2 (Buy).
Price and Consensus: CVAC
Immunocore is a commercial-stage biotechnology company pioneering 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 (tebentafusp-tebn), has been approved by the FDA for the treatment of HLA-A*02:01-positive adult patients with unresectable or metastatic uveal melanoma (mUM). The company has entered into a collaboration and supply agreement with French pharma giant Sanofi. Strategic collaborations like these will boost pipeline progress. Immunocore is 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.
IMCR’s consensus loss estimate for 2022 earnings has narrowed to $2.78 from $4.22 over the past 60 days. The company currently has a Zacks Rank #2.
Price and Consensus: IMCR
Dynavax, a commercial-stage biopharmaceutical company, is developing and commercializing innovative vaccines against infectious diseases. It has two commercial products, HEPLISAV-B vaccine [Hepatitis B Vaccine (Recombinant), Adjuvanted], which is approved in the United States and the European Union for the prevention of infection caused by all known subtypes of hepatitis B virus in adults 18 years of age and older, and CpG 1018 adjuvant, currently used in multiple adjuvanted COVID-19 vaccines. The company is also advancing CpG 1018 adjuvant as a premier vaccine adjuvant through global research collaborations and partnerships focused on adjuvanted vaccines for COVID-19, seasonal influenza, universal influenza, plague, shingles and Tdap.
DVAX’s consensus earnings estimate for 2022 earnings has increased to $1.73 from $1.15 over the past 60 days. The company currently has a Zacks Rank #2.
Price and Consensus: DVAX
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