Investors are always looking to buy stocks or sectors with the potential to establish market share in growing industries.
Currently, many of these opportunities are already overvalued or overextended. However, one exception is biotech stocks.
During the first half of the bull market from 2009 to 2014, biotech stocks were big outperformers. However, they underperformed in the latter part of the bull market.
From 2009 to mid-2015, the iShares Nasdaq Biotechnology ETF (IBB) gained 583%. From that top, it’s been range-bound with a 1% gain over the last 5 years.
However, this consolidation phase is a healthy development for the sector’s long-term prospects. It allowed sentiment to reset, overbought technical readings to be relieved, and valuations to improve. Many large-cap biotech companies posted revenues and earnings growth which exceeded stock price performance, leading to more attractive valuations.
In recent months, the index looks like it’s consolidating on low volume with low volatility near all-time highs. If it can move past these levels on strong volume, it would be an indication that the bull market is ready to resume for the sector.
Potential for Genomics
Due to the aging population in wealthy countries like Japan, Germany, and the United States, there is a constant need for effective treatments and therapies. It’s one reason that healthcare spending growth has exceeded economic growth rates for decades.
Advances in biotech have already resulted in lowering the cost of drug development and increasing the effectiveness of diagnostic tools. In the future, many believe that it will be possible to develop individualized medicine based on a person’s DNA.
The cost of sequencing the human genome has plunged – it, now, costs hundreds of dollars to sequence DNA while it to cost billions of dollars to map the first genome. The ability to understand the genome is opening up other possibilities like the possibility of editing DNA to combat chronic diseases.
The coronavirus is another catalyst for the sector as global healthcare spending is set to increase. The coronavirus has highlighted the need to upgrade the country’s healthcare infrastructure to handle these types of situations.
Another potential source of strength for biotech stocks is that pharmaceutical companies are facing a “patent cliff” which means that the blockbuster drugs which drive their business will need to be replaced.
Developing new drugs is a difficult process with no guarantee of success, even for companies with deep pockets. But, one potential solution is to fill the pipeline by buying smaller, biotech companies who are working on projects with potential. This M&A activity is also facilitated by the low-interest-rate environment.
The Fed’s determination to keep rates low for an extended period is another tailwind for biotech stocks as it leads to more generous multiples for growth stocks. We are also seeing many biotech IPOs which is another sign of strong investor demand. 2020 has been the strongest year for biotech IPOs with 60 companies going public and raising $8.3 billion.
Many niches within biotech have lots of potential, however, I believe genomics has the most potential to produce stocks that gain many multiples in prices.
Here are some of the most important breakthroughs and their applications:
- Next-Generation Genomic Sequencing – It’s expected that the cost of mapping a person’s genome will drop to $100 in the next five years. This can tell people what diseases they are predisposed to getting and immediately identify any potential health issues such as identifying disorders in babies and infants which could take years previously. All of these developments will significantly improve health outcomes.
- CRISPR Gene-Editing – CRISPR is a gene-editing platform. Companies are using the platform to develop new therapies, research & development, and save costs and increase the effectiveness of drug development. Many believe that CRISPR can be used to edit genes in existing cells, control cellular processes, and protein expression. Additionally, there are applications beyond medicine into fields like agriculture, diagnostics, chemicals, and material science.
- Living Drugs – Living drugs are treatments that come from other, living organisms. They attempt to use the body’s biology and immune system to fight against diseases. Currently, it’s primarily used for cancer, but hundreds of treatments are expected to become available in the coming years. These drugs come with fewer side effects and are less harsh than most pharmaceutical drugs.
Investors should keep this sector on their radar screens as it has significant, long-term potential. Three of the more-established genomics companies are Intellia Therapeutics (NTLA), Editas Medicine (EDIT), and CRSPR Therapeutics (CRSP).
Intellia Therapeutics (NTLA)
NTLA has a market cap of $1.4 billion, but only $50 million in sales, so the stock is priced based on its potential. However, the company has several treatments in the pipeline, including ones targeted towards sickle-cell and acute myeloid leukemia
NTLA uses CRSPR/Cas9 to create RNA strands that are injected to neutralize viruses. It’s expected that over the next decade this will yield therapies for a variety of diseases. So, although NTLA is…
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