Investors looking for profits in the healthcare sector had a difficult time in 2017 if they weren’t in biotech. The Health Care SPDR ETF (NYSE: XLV) only gained 13.15% last year, while the S&P 500 climbed 22.5% over the same time period.
But the biotech sector crushed the market, with the SPDR S&P Biotech ETF (NYSE: XBI) returning a market-beating 43.36% in 2017, nearly double the broader S&P 500.
That’s why we’ll show you the three best biotech stocks to buy for 2018.
Despite the exceptional run for biotech stocks in 2017, the broader healthcare sector has been facing a strong headwind over the past few years that scared away some investors.
Drug pricing controversies, increased generic competition for blockbuster drugs, and the recent merger between retail giant CVS Health Corp. (NYSE: CVS) and insurance company Aetna Inc. (NYSE: AET) have weakened returns for shareholders.
In addition, Amazon.com Inc. (Nasdaq: AMZN), Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK.A), and JPMorgan Chase & Co. (NYSE: JPM) announced a joint venture to enter the health insurance industry.
Together the three companies intend to create a health insurance company “free from profit-making incentives” and give the broader health insurance a “wake-up call.”
As you might expect, all the major health insurance providers dropped 3% to 5% after the news came out.
While these developments don’t make the healthcare sector seem like an attractive investment, the reality is, biotech stocks are still some of the best profit plays you can find in any industry.
And fortunately for us, when strong companies get overlooked, they often become undervalued. That means you can buy some of the top biotech stocks in the industry at a fraction of their true value.
We’ll show you our three best biotech stocks to buy for 2018 in just a minute.
But first, here are three catalysts driving this bull market for biotech stocks…
3 Reasons to Own Biotech Stocks in 2018
Money Morning Director of Technology & Venture Capital Research Michael A. Robinson says the biotech industry has the potential to produce multiple triple-digit gainers in 2018.
The biotech sector in the United States is worth nearly $163 billion. New drugs are constantly being developed and reaching consumers.
Here are the three primary catalysts driving growth in biotech stocks.
The Aging U.S. Population
Right now, 65 million baby boomers are over the age of 65 in the United States. The older they get, the more they’ll need medications and interventions for diseases like cancer, heart disease, diabetes, high blood pressure, stroke, vision problems, and Alzheimer’s. And biotech companies are developing the drugs and therapies to treat those diseases.
Mergers & Acquisitions
During the first four days of 2018, biotech buyouts of $11 billion hit the market. In 2017, mergers and acquisitions in healthcare equaled just $200 billion. Baker McKenzie forecasts that the level of M&A activity would climb 50% in 2018, to $300 billion.
A Favorable Regulatory Environment
With U.S. President Donald Trump in office, analysts expect uncertainty over drug price policy to dissipate. Robinson expects few or no policies that negatively affect the healthcare sector from the Trump administration this year. In addition, the U.S. Food and Drug Administration is expected to start moving more quickly on drug trial approvals to bring life-saving drugs with positive results to market faster.
And that means the best biotech stocks not only have a favorable year ahead, but they can be bought for a discount right now.
Investors currently investing in exchange-traded funds like the S&P 500 SPDR (NYSE: SPY) are paying a roughly 19.5 multiple on expected 2019 earnings.
The biotech stocks we’re about to show you are a much better value, and our top pick has upside of 72.9% this year based on that multiple…
Best Biotech Stocks to Buy for 2018, No. 3: Amgen Inc.
Amgen Inc. (Nasdaq: AMGN) currently trades at $183.50 and offers an attractive 3% dividend yield.
Now, AMGN shares have been weak over the past 12 months, rising just under 3% amidst a strong bull market. But you’re not looking for past returns, you’re looking for future potential, and AMGN is primed to grow in 2018.
Patents for Amgen’s nephrology and oncology drugs have expired, which has increased the competition for those drugs. Company officials said their nephrology and oncology drugs still remain competitive in their recent Q4 2017 earnings call.
Full-year revenue dipped slightly, by 1%, in 2017, to $22.8 billion. However, full-year earnings per share (EPS) rose 8%, and operating margins increased to 53.5%, one of the best margin increases in the industry.
But most importantly, Amgen has a strong pipeline of drugs in development, with Repatha, Prolia, KYPROLIS, and Aimovig. These drugs treat a broad range of diseases from coronary disease to leukemia and small-cell lung cancer.
Next up is a stock that was at one point down nearly 50% from its all-time high because of falling hepatitis C (HCV) drug sales…
Best Biotech Stocks for 2018, No. 2: Gilead Sciences Inc.
Gilead Sciences Inc. (Nasdaq: GILD) is the cheapest stock on this list at $81.04 per share.
The company plunged from about $118 in July 2015 to $65 by May 2017 after company officials said sales of its blockbuster HCV drugs Harvoni and Sovaldi would fall due to increased competition from generic versions of the drugs.
Still, in the last quarter of 2017, Gilead reported revenue of $5.9 billion with diluted EPS of $1.78. Both metrics beat analysts’ expectations by 6.6% and 4%, respectively.
While in the short-term, GILD shares will likely trade sideways, investors with a time horizon between five and 10 years could see shares eventually triple if not quadruple.
That’s because Gilead is developing treatments for diseases like influenza, HIV, hepatitis B, and hepatitis C.
If Gilead is able to deliver an effective treatment for one of these common, incurable diseases, it will have another blockbuster drug on its hands. And with cash reserves of more than $36 billion, Gilead has a massive budget to pump into drug research and development.
GILD shares offer an attractive 2.82% dividend yield.
Robinson points out that if Gilead reaches the S&P 500’s 19.5 earnings multiple, its share price could climb to $125 based on next year’s expected earnings of $6.45 per share. From the current share price of $81, that represents 54.3% upside.
Now, the last stock on this list tips the scales with a conservative upside estimate of 72.9%…
Best Biotech Stocks for 2018, No. 1: Celgene Corp.
Celgene Corp. (Nasdaq: CELG) turned in an excellent performance for Q4 and full-year 2017. Product sales hit $13 billion, a 16% year-over-year increase.
Q4 operating EPS rose 24% year over year, and full-year adjusted EPS increased 25% year over year. Celgene’s operating margin also rose to 58%.
However, investors sold off CELG shares in the fall of 2017 after the company lowered earnings guidance through 2020 and analysts downgraded the stock.
Robinson agrees that the company has some challenges, primarily falling sales of its No. 3 best-seller, Otezla, a psoriasis and psoriatic arthritis drug. It also stopped trials of its Crohn’s disease drug in development in October 2017.
But there are also reasons to be optimistic about the stock.
First, Celgene’s multiple myeloma drug is the go-to treatment for oncologists. Plus, Celgene received FDA approval to expand the drug to treat other types of cancers.
Second, Celgene has $14 billion worth of drugs in its development pipeline. The company also has collaborative agreements with more than a dozen other biotech companies, including Juno Therapeutics Inc. (Nasdaq: JUNO).
Third, the company extended the patents on its top-selling drugs through 2020, which should help shield its profitability until it can get approval for its drugs in development.
Right now, Celgene shares trade at $95.43. But Robinson points out that if it reached the market multiple on the S&P 500, the shares could reach $165 based on next year’s expected EPS of $8.47 per share. That’s more than 72.9% above the current price per share.
Source: Money Morning