Is It Time to Bet on Biotech?

Recent progress in high-profile research areas such as ALS and Alzheimer's has given a jolt to the overall biotech sector. Here, three contributors to MoneyShow.com look at the sector from diverse perspectives. One highlights holdings from a well-known biotech hedge fund; one reviews a trio of closed-end biotech funds; another finds three biotech stocks offering technical appeal. Nikolaos Sismanis, Sure Dividend Founded in 2000 by Julian and Felix Baker, Baker Bros. Advisors is a private hedge fund based out of New York City. Together, they have combined their individual expertise to generate superior returns by focusing solely on the biotech industry. The two brothers don't believe in diversifying the portfolio. Instead, they emphasize that focusing on specific companies, which they can analyze and understand deeply and place concentrated positions in their securities, can generate superior returns over the long term. Performance over the past three years has lagged, but it could be a temporary phase for the fund, which, after all, focuses on long-term returns. Incyte Corporation focuses on the discovery, development, and commercialization of various therapeutics. Its flagship products include JAKAFI, which is a drug for the treatment of myelofibrosis and polycythemia, and Iclusig, a kinase inhibitor to treat chronic myeloid leukemia. Unlike many biotech companies, which are pre-revenue, Incyte has been growing its top and bottom line for years. Revenues have expanded from around $169 million in 2010 to $3.32 billion over the past four quarters. The stock is trading at a forward P/E ratio of ~25, which is a near-record low valuation multiple for the company. EPS over the medium-term is expected to grow by around 30% since Incyte is an industry leader, having essentially monopolized its areas of treatment. In that regard, the valuation seems compressed. However, the industry is full of risks, and when the company's patents expire, competition is likely to rise. The fund owns around 16.3% of the company, with a market cap of $15.9 billion. The position was boosted by less than 1% in the previous quarter. BioMarin Pharmaceutical Inc. formulates and markets therapies for people with severe and life-threatening rare diseases and medical ailments. While the company's revenue growth has seemingly stagnated over the past couple of years, it appears that the company's development pipeline remains rather strong. Most recently, BioMarine got a positive CHMP opinion in Europe for ValRox for the treatment of Hemophilia type A. BioMarin has had a place in Baker Bros' portfolio since Q2 2012. The position was left unchanged during the previous quarter. BioMarin is now Baker Bros' fourth largest holding, with the fund owning 4.11% of the company's outstanding shares. ACADIA Pharmaceuticals Inc. focuses on the development and commercialization of small molecule drugs aimed at unmet medical needs in central nervous system disorders. The company features extraordinary revenue growth, at a five-year CAGR of 34.6%. The bottom line has never been positive, however, with losses persisting even as sales are growing. In March of 2021, Acadia had announced deficiencies identified by the FDA regarding its marketing application for Pimavanserin in hallucinations and delusions associated with dementia-related psychosis. The shares plunged by a massive 45%, and they have yet to recover since then. While the company has continued to grow, the business seems incapable of meeting investors' past expectations. This is one of the fund's highest conviction picks, as Baker Bros still owns nearly 26% of the company's shares, which have been held since 2010. While the fund has made great gains since, the recent plunge has definitely compressed its unrealized gains, as the position was held stable once again. Michael Foster, CEF Insider President Biden's National Biotechnology and Biomanufacturing Initiative primes the sector for strong gains. This is a multi-billion-dollar project designed to bring the production of more vital treatments to the U.S. The plans are ambitious and wide-ranging: there's hope to develop new antibody therapeutics, alternatives to meat, biodegradable plastics and age-reversing technology. All of this boils down to the fact that the government is turning on the flow of money to biotech at a time when the Fed is reducing the flow of money to the economy as a whole. That will set up the sector to regain its edge. But not all biotechs will benefit equally, which is why we're playing the Biden biotech boom through an actively managed closed-end fund (CEF). The best biotech CEFs are managed not just by financial pros but also by Ivy League-trained medical doctors and researchers who can cast a critical eye on the research churned out by different pharma firms. This is why CEFs are the ideal tools for biotech investing. Algorithm-run ETFs and individuals picking their own stocks simply can't compete with financial and medical experts who know the sector inside and out. The pros at the 7%-yielding Tekla Healthcare Opportunities Fund are a perfect example. This fund, like all funds managed by Tekla, is run by a mix of financial and medical pros with decades of experience. Its portfolio is solid, sporting a mix of blue-chip firms with healthy cash flows and smaller firms with solid pipelines of drugs and medical devices. THQ sports an 8.6% discount to net asset value, so we're essentially buying for 91 cents on the dollar here. I'm expecting THQ's discount to flip to a premium, taking the fund's price along with it. THQ is a good choice, but we prefer two other biotech funds -- the Tekla Healthcare Investors Fund and Tekla Life Sciences Investors Fund . These funds have yields of 8% to 10%. In addition, there are some key differences in their portfolios that provide greater upside. While THQ has many large-cap medical companies to smooth out the risks from the smaller biotech firms. HQL, in particular, is more focused on more growth-oriented pharma firms doing solid research. This is where Biden's plans are going to translate into the biggest windfalls of R&D cash. Similarly, HQH holds strong companies, like Regeneron and Vertex , which are two of its top-three holdings. Both are also well-positioned to profit from Biden's plans. Mike Cintolo, Cabot Top Ten Trader Non-alcoholic steatohepatitis (NASH) has been called a silent disease with few or no symptoms. It's an advanced form of fatty liver disease that can be caused by underlying conditions like obesity, metabolic syndrome or type 2 diabetes, although it's currently without any approved therapies. Akero , a clinical-stage cardio-metabolic biotech, is leading the way to find a treatment for this potentially deadly affliction. The company's lead drug candidate, the genetically engineered fusion protein Efruxifermin (Efru), is currently being evaluated in a Phase IIB clinical trial as a potential treatment for NASH. Encouraging results for Efru are a big reason behind Akero's recent strength after the company said the drug improved liver fibrosis without the worsening of liver disease, reaching the main goal of the latest trial. Akero also took important steps in Q2 to fund its development of Efru, including closing a $25 million equity investment from Pfizer and a $100 million term loan facility from business development company Hercules Capital. The current numbers (or lack of them) are basically meaningless, as Q2 saw no sales and a 77-cent EPS loss. But management has high hopes for successful Phase III for Efru, an outcome that would put Akero firmly on the path toward profitability. AKRO came public in June 2019 at $16, and after the typical post-IPO drop, went on to reach a high of $41 in July of the following year. This proved to be a major peak. A technical bottom was finally established this June at $8, and after three months of bottom building, the stock recently more than doubled on exceptionally high volume following the trial results. The stock has held up well despite the market mayhem -- though we'd still aim for dips if you want in. As the global population ages, eyesight disorders like macular degeneration and retinal problems are becoming a growing burden for millions of people. A potential leader in this market is Iveric , a biopharma focused on the discovery and development of treatments for retinal diseases. The catalyst for the latest strength was a report that Iveric's drug called Zimura met its main goal on a second Phase III trial (called Gather 2) to treat an eye disease called geographic atrophy (GA); the drug is the company's lead candidate for treatment of GA secondary to age-related macular degeneration (AMD). The current numbers obviously don't mean much, with Q2 seeing a per-share earnings loss of 41 cents. More significantly, the company just announced it garnered a $250 million non-dilutive long-term loan to strengthen the balance sheet and help finance the potential Zimura launch. Going forward, Iveric is exploring Zimura's potential to treat early-stage AMD, with a clinical trial to begin in Q4. Technically, ISEE rallied to $19 late last year and, after a big correction, actually made it back to that level in early April before the bear market finally pulled the development stage stock to $9 in June. The action after that was very hectic, but we're thinking the move on the Zimura results has changed the landscape. We'll set our buy range down a bit if you want to take a swing at it. Repligen makes equipment and materials used in the production of biologic drugs, from cell cultures through purification (chromatography) to the formulation of vaccines, and its equipment is widely used in the development and manufacture of mRNA and DNA therapies. While the outlook for Repligen's Covid-related revenue has diminished this year as Covid fades (it accounted for just 17% of sales in the latest quarter), it has been more than offset by market momentum for its monoclonal antibody and gene therapy markets (80% of Q2 sales), with expectations that it will more than pick up the slack going forward. Looking ahead, Repligen expressed confidence in the outlook for the rest of 2022, guiding for full-year revenue of $800 million at the midpoint -- an overall growth rate of 20% if realized and in-line with estimates, with base business revenue projected to increase 32% (which is what big investors are keying on). It's likely that earnings estimates here will prove very conservative. After hitting a record high of $320 one year ago, then sinking to a two-year low of $138 in April, RGEN kicked off a 12-week base-building phase. The stock surged in July after an upgrade, and so far the correction from that point has been reasonable, with support near the 50-day line a couple of times. Of course, in this environment, a break of support is always possible, so we'll set our buy range up a bit, as a strong rally off support will probably tell you a run higher has begun.

Is It Time to Bet on Biotech?

The government is turning on the flow of money to biotech at a time when the Fed is reducing the flow of money to the economy.

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