Top Biotech Stocks to Watch in 2015: What’s Trending in 2015

Top Biotech Stocks to watchIn searching for the top biotech stocks to watch in 2015, let’s not forget that many on Wall Street are talking about the group’s sky-high valuations. In fact, since the start of 2012, the NASDAQ Biotechnology index has gained 256%. In the same period, the S&P 500 has only mustered a 65% gain.

With that in mind, it’s important to do proper due diligence on any biotech stocks in 2015. With the biotechnology index on fire, due diligence will help investors avoid the high-risk stocks.

A rough estimate shows that only 30% of the 150 companies that make up the biotech index are profitable. Only 30%! High-potential, no-profit biotech stocks are the most likely to come down as investors become less willing to pay up for growth.

In this article, I’ll start with one of the biggest names in biotechs and move up the risk/reward curve with the last stock listed below. For 2015 and onward, these are some examples of the top biotech stocks to watch out for and do your homework on.

Top Biotech Stock #1: Gilead Sciences, Inc. (NYSE/GILD)

Founded in 1987 and with a current market cap of $150 billion, Gilead is the biggest player in the industry. Focusing on life-threatening illnesses, the company researches and commercializes treatments for HIV/AIDS, hepatitis C, and cancer. With a price-to-earnings (P/E) ratio of 14, compared to an industry average of 49, Gilead can be considered one of the few growth stocks trading at a reasonable price in the biotech industry.

Gilead also posts an impressive net margin of 49%. (Source: Gilead Sciences, Inc. web site, last accessed March 23, 2015.) That means $0.49 of every dollar of revenue goes to earnings on common shares. The company clearly isn’t short on profits and has posted a 29% annual revenue growth rate over the past five years—quite the track record.

A large portion of the performance can be attributed to Gilead’s dominant position in HIV/AIDS treatment. The company offers several antiretroviral medications aimed at treating this disease; in this category, the notable mentions are “Atripla,” “Stribild,” and “Complera”—which combined for 24% of 2014 sales.

The key differentiator is that these medications can be used as a standalone or as part of a regimen to treat HIV with a one-pill-a-day dose. From 2006 to 2014, Gilead’s antiretroviral therapy has grown from serving 30,000 to more than seven million people in developing nations. (Source: Gilead Sciences, Inc. web site, last accessed March 23, 2014.)

What are the catalysts going forward?

Its blockbuster hepatitis C drug “Sovaldi,” which was approved in 2013, and its newly approved “Harvoni,” a drug targeted to treat chronic hepatitis C, produced $12.4 billion in sales for 2014. Drugs aimed at the treatment of hepatitis amounted to 50% of total 2014 sales for the company and revenues are expected to continue rolling in. An additional driver is Gilead’s HIV/AIDS drug franchise, serving as the company’s backbone.

Acquisitions are another tool that management will continue to implement successfully. In 2011, the acquisition of Pharmasset Inc. helped Gilead introduce its hepatitis C drug Sovaldi and opened new doors. Gilead’s size gives it the ability to find and purchase new opportunities in the future.

Newer medications will protect Gilead from patent expiration on older medicines and the resulting competition from generics. Dominance in core markets will provide investors with strong returns for years to come in an all-too-often hit-or-miss biotech industry.

From Gilead Sciences, an established competitor with a diverse pipeline, I move onto a highly profitable niche player with a dominant position in the biotech sector.

Top Biotech Stock #2: Alexion Pharmaceuticals, Inc. (NASDAQ/ALXN)

With a market capitalization of $37.5 billion and a niche focus, Alexion Pharmaceuticals stands in stark contrast to Gilead, which provides treatments to millions of patients. Alexion is truly focused on a niche market—rare and chronic blood disorders. Its main product, “Soliris,” targets two ultra-rare blood disorders (paroxysmal nocturnal hemoglobinuria and atypical hemolytic uremic syndrome) that affect roughly 10,000 people in North America and Europe.

The niche market strategy has paid off big-time. Over the last three years, Alexion’s gross margin has averaged 92%. That means that for every $1.00 in revenue, the company keeps $0.92 to cover research and development costs, pay off debts, and cover taxes. It also saw compounded revenue growth of 44% over last year and 36% from 2012 to 2013. (Source: Alexion Pharmaceuticals, Inc. web site, February 6, 2015.)

Impressive growth and profitability stems from the fact that Soliris costs nearly $500,000 annually and may be required over the patient’s entire life. Soliris has proven to be highly effective; as a result, providers have subsidized the costs. Stable cash flows will be supported by continued subsidies and patents for Soliris, which are expected to last beyond 2020.

Another catalyst for Alexion Pharmaceuticals is the possible approval from the U.S. Food & Drug Administration (FDA), the European Union (EU), and Japan’s Ministry of Health for a new drug aimed at treating patients with infantile- and juvenile-onset hypophosphatasia. (Source: Alexion Pharmaceuticals, Inc. web site , March 2, 2015.) This is an even rarer disease that leads to deformities of the bones, muscle weakness, and premature death. Alexion’s clinical trial results have been positive, and the approval is another driver for this biotech company in 2015 and onwards.

Now I’d like to move on to an even smaller biotech name with manageable risk and a reasonable (albeit, much smaller) valuation.

Top Biotech Stock #3: Grifols, S.A. (NASDAQ/GRFS)

Headquartered in Barcelona with a market cap of $4.35 billion, Grifols focuses on plasma protein therapies that help treat diseases like immune deficiencies, autoimmune disorders, and hemophilia, a blood clotting disorder. Conditions treated by plasma protein therapy (proteins extracted from human plasma to create biological, not synthetic, medicines) are rare, life-threatening, and chronic.

Grifols faces only two major competitors in this concentrated industry and retains 20%+ market share in most of its biosciences products. (Source: Grifols, S.A. web site, November 2014.) Bioscience makes up 75% of the firm’s 2014 revenues, with the remainder largely made up by its diagnostics business, which creates products for laboratory analysis in use at hospital blood banks and transfusion centers. Standing in a strong position in its markets, Grifols is likely to generate stable revenue for years to come.

Unlike many of its biotech peers, Grifols trades nowhere near its 52-week high; in fact, it is 28% below its high. The shares have been in decline since June 2014. After reporting full-year 2014 results, in which revenue grew 22% from the previous year, some analysts downgraded their lofty stock price targets. This was largely because the biosciences division posted revenue growth of five percent.

While exponential sales growth may be out of sight, steady revenues will support Grifols. With a beaten-down share price, reasonable expectations going forward, and a dividend payment, Grifols is set to perform in 2015 and beyond.

One final note: while these three stocks may be worth your attention, I highly recommend all readers perform their own thorough due diligence on any stocks mentioned in these pages.