Biotech stocks: big bucks or a busted flush?

Biotech stocks are surging right now as companies race to find a cure for the coronavirus. Unfortunately, this may not prove to be a profitable endeavour

Biotech stocks                                 

You may not be surprised to hear that biotech stocks are enjoying a box office performance right now. The most promising biotech stocks are currently embroiled in a frantic race to develop vaccines and treatments for the coronavirus. Tens of thousands of new Covid-19 infections continue to emerge every day worldwide – and unless we want to carry on social distancing for ever, we’re going to need some medical muscle to get us out of this mess.

Here, we’re going to give you a snapshot of how the biotech stock market is performing and cast a spotlight on three of the hottest biotech stocks. But a quick word of warning before we continue: investing in biotech stocks can be an exceedingly risky game and it is highly likely that some companies in this industry have astronomically high valuations that’ll prove unsustainable in the long run.

Biotech stock news

Let’s begin with a super quick round-up of the latest biotechnology stock news. The sector has picked up momentum because treatments that would usually take years or decades to produce are being developed and approved within a matter of months. Biotech stocks to watch include those that have managed to streamline their processes so products can be brought to market more quickly. Although it’s true that some of the more headline-grabbing announcements won’t ever produce something tangible, a lasting legacy of Covid-19 could be a new-found ability to manufacture new drugs quickly.

Exchange-traded funds that focus solely on biotechnology stocks have proved to be a winner in recent months. Case in point: look at the iShares Nasdaq Biotechnology ETF. It now has $8.8bn in assets – and in the three months to June 11, it had inflows of a whopping $661m.

After falling to lows of $94.39 on March 16, in keeping with a dismal picture across the rest of the stock market, this biotech stocks ETF has soared by 46 per cent. This is undoubtedly a head-turning performance. Compare this with iShares’ consumer goods ETF, which has rallied 36 per cent in the same time period, or its US real estate ETF, up 37.6 per cent.
Meanwhile, State Street’s SPDR S&P biotech stocks ETF is even outpacing the sacred quintuplet of Facebook, Amazon, Apple, Netflix and Google after gaining almost 50 per cent since the end of March.

SPDR S&P 500 ETF
Daily change
391.3
Low: 390.66
High: 393.55

Even though many investment banks have upped the ante by slapping buy ratings on biotech stocks, some analysts are warning that backing smaller companies could backfire – and even larger corporations in this industry may have fallen victim to a buying frenzy. As Polar Capital healthcare fund manager Daniel Mahony told Bloomberg:

“It strikes me that some of them look a little overvalued. When you look at the valuations, what are the implied inputs that some investors are putting in to justify that rise in value?”

The challenge with biotech stocks could be this: putting your cash behind the company that successfully develops a Covid-19 vaccine is like selecting the winning horse on Grand National day. It’s estimated that dozens of experimental vaccines for coronavirus are in the works right now. There are countless hoops to jump through before they are tested on humans – a massive step – and even then, only 10 per cent are successful.

And what happens if you own biotech stocks that do find a cure for coronavirus? Well… don’t expect profits to go through the roof. Many firms are keenly aware that charging too high a price would amount to a PR disaster – and likely prompt headlines of outrage in newspapers the world over. Because of this, some are prepared to supply their vaccines at cost price. That’s undoubtedly going to be good news for cash-strapped governments that have little money to spare after speedily rolling out unprecedented economic stimulus packages.

The best biotech stocks

So… what are the best biotech companies to invest in now? Let’s delve into the market outlooks for three major biotechnology stocks:

Sanofi outlook

Sanofi Adr Rep 1 1/2
Daily change
47.73
Low: 47.31
High: 48.01

Let's begin with the French healthcare giant Sanofi. It’s spending some serious cash in order to deliver a coronavirus vaccine – and it’s expecting to have full approval by the middle of 2021.

It’s arguably one of the best biotech stocks to buy if you’re interested in healthy dividends. Of late, it has been paying dividends of $1.17 a share, according to Zacks Equity Research, and the company also expects its earnings to grow by 5 per cent over the course of 2020. This, in conjunction with the fact that it’s about to enjoy a windfall of up to $12bn as it sells its shares in Regeneron Pharmaceuticals, makes it look likely that dividends could grow further.

Sanofi has been in the spotlight after its CEO suggested that America may get access to any Covid-19 vaccine first because of how the US government has invested substantial amounts in the company’s research and development drive. After a backlash, he stressed that the vaccine will be available to multiple markets simultaneously – and to this end, a new vaccine production site is being built in France.

Moderna outlook

Moderna, Inc.
Daily change
178
Low: 170.74
High: 179.12

Next on our biotech stocks list is Moderna. The stock has practically come from nowhere since the start of the year – and at the time of writing, it’s up 227.3 per cent compared with where it was on January 2.

If you’ve been following biotech stock news, you may be aware that this company seems to be the leader of the pack when it comes to the race for a new Covid-19 vaccine. Moderna CEO Stephane Bancel believes that his firm has an 80 to 90 per cent chance of its treatment proceeding to human clinical trials. Although it doesn’t have any products in the market yet, it’s set to embark on an efficacy trial featuring 30,000 people next month.

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All of this is significant because this points to a business model that’s far speedier and far less anaemic than the more established biotech and pharma giants. If effective treatments can be developed and jump through all the regulatory hoops in under two years, this could result in big business for Moderna as it sets its sights on other conditions in future.

That said, getting things wrong after publicly expressing confidence about success could undermine trust in the company and its stock.

Gilead Sciences outlook

Gilead Sciences
Daily change
62.42
Low: 62.42
High: 63.77

Gilead Sciences has already developed a strong track record after effectively curing hepatitis C. In the endless coronavirus coverage in newspapers and on TV screens, you may have heard talk about an antiviral drug known as remdesivir. The company behind it? Gilead Sciences.

Remdesivir was initially created to tackle ebola, but some studies have since shown that Covid-19 patients who took the drug recovered four days faster than those who didn’t. Better still, the company is optimistic that it could produce several million treatments in 2021.

There are challenges ahead for Gilead Sciences. This drug can’t be offered in pill form because there’s a risk it could damage the liver. It’s currently being administered intravenously, but the company is exploring whether it could be inhaled instead.

It may not be a cure, but it could be an effective treatment for those who are at an early stage of their coronavirus diagnosis. Studies could begin on Covid-19 patients as soon as August.

Biotech stocks: invest or not?

There’s clearly a lot of activity in this industry right now. The question is whether it amounts to a long-term proposition.

A big source of debate is whether drug companies that are investing billions of dollars should be entitled to make money if they find a treatment or cure. This affects investors.

Some analysts believe it is unfair if investors are penalised for a company’s success. Others warn biotech companies may be reluctant to dedicate resources to finding cures in future if they aren’t treated fairly this time around.

Indeed, even if a margin is applied to these drugs, it could be argued that healthcare systems would still save money compared with the cost of a lengthy stay in intensive care.

As all of these questions hang in the balance, investors face a risk – just like biotech companies face a risk as they race to develop a vaccine that may not work.

FURTHER READING: Stock market forecast for the next five years

FURTHER READING: Clorox stock forecast: are the shares overvalued?

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