The best biotech stocks to watch for in May 2015 are businesses that dominate their respective market, command a diverse drug pipeline, and have lots of profits to show for it.
Profitability is crucial given that the NASDAQ Biotechnology Index continues to climb higher, gaining 12% in 2015 and adding to the 36% increase in 2014. Biotech stocks with extended valuations will be the first to sell off when euphoria wears off and investor expectations regarding future profits normalize. So, let’s focus on the best biotech stocks—ones with strong earnings and reasonable valuations.
Biotech Stock to Watch #1: Amgen Inc. (NASDAQ/AMGN)
Amgen Inc. is a biotechnology giant—earning $20.0 billion in revenue and $5.1 billion in net income during 2014. Amgen’s top drug, “Neulasta,” aimed at reducing white blood cell disorder caused by chemotherapy, generated $4.6 billion in sales during 2014, up six percent from 2013.
Profit growth for 2015 and beyond will come from Amgen’s research and development efforts, as the company has over 11 drugs in stage-two and 12 drugs in stage-three clinical trials. Late-stage development drugs are aimed at treating various cancers like multiple myeloma and ovarian cancer, as well as rare forms of arthritis and osteoporosis. (Source: Amgen 10K, February 19, 2015.)
The impressive pipeline of drugs helps Amgen generate mountains of cash. Free cash flow, which is operating earnings less R&D expenditure, a measure of the company’s ability to generate cold hard cash, totaled $7.8 billion. Free cash flow has grown at an average pace of 10% since 2010, generating Amgen plenty of money to spend on research and development along with dividend payments.
Strong performance continues as Amgen reported stellar first-quarter 2015 results, beating analyst expectation by 17%. It is expected to grow earnings by 42% throughout 2015. Amgen is a great biotech stock, returning 40% since the start of 2014, and should therefore be on investors’ watch lists. (Source: WSJ, last accessed May 1, 2015.)
Biotech Stock to Watch #2: Biogen Inc. (NASDAQ/BIIB)
Biogen Inc. is another biotech giant, with a market cap of $91.0 billion. Biogen’s best selling drugs treat multiple-sclerosis (MS), a progressive neurological disease leading to a loss of muscle control and eventually paralysis. In fact, roughly $8.0 billion of the $9.0 billion Biogen generated in sales for 2014 came from drugs aimed at MS. (Source: Biogen 10K, February 4, 2015.)
The first quarter of 2015 had Biogen off to a strong start, with sales up 20% and earnings 70% higher than the same period last year. Analysts chose to focus on the slightly underperforming sales of “Tecfidera,” the company’s best-selling MS drug. However, Biogen remains the leader in MS with newly launched medicines in a $6.0-billion hemophilia market. (Source: Biogen 10Q, April 24, 2015.)
Biogen earnings are expected to grow at 35% in 2015, and another 16% in 2016. With the stock trading at 23 times forward earnings, along with a reasonable valuation for the strong growth expected, investors should keep Biogen on their radar in 2015. (Source: Yahoo Finance, last accessed May 1, 2015.)
Risks of Biotech Stocks
One final note: while these two stocks may be worth your attention, I highly recommend all readers perform their own thorough due diligence on any stocks mentioned in these pages. Moreover, biotech stocks are some of the riskiest on the market. Their success depends on regulation, FDA approval, and patent protection, which are largely out of the companies’ control. Therefore, risk-averse investors should stay away from this industry entirely.