Three biotech stocks to buy as the sector comes of age

published 16 January 2015

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Carl Harald Janson, investment manager, International Biotechnology Trust.

The biotechnology sector once largely filled with tiny, high-risk companies has evolved considerably over the last decade. Investors can now invest in large companies that generate both cash and profits. Or they can opt for smaller, riskier ventures, which could also end up being possible acquisition targets for larger rivals.

We have chosen three biotech companies which represent this broad range of investment options a large profitable company, a medium-sized enterprise which generates revenue but no profits, and a small-cap stock with neither earnings nor revenue as yet.

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US biotechnology giant Gilead (Nasdaq: GILD) recently launched Sovaldi, a new drug to treat hepatitis C. This revolutionary treatment cures more people of the disease, till now a chronic condition.

The drug will generate strong profits and it will take many years to treat the existing pool of patients. But Gilead is not just a one-trick pony it also has a strong HIV franchise, and an emerging oncology programme.

Gilead has perfected its business model it selects a disease area and then aims to dominate it, either by developing its own drugs or buying the best from other companies.

The management team is small and nimble most of the board has been in place for the last 25 years. We believe they will take advantage of Solvadi's cash generation to re-invest in new drugs and drive future earnings growth. With a 2015 price/earnings ratio (p/e) of 11 times, Gilead's valuation is also appealing.

BioMarin (Nasdaq: BMRN) specialises in 'orphan' diseases. These conditions affect a relatively small number of patients usually 5,000 to 10,000 and tend to be caused by genetic mutations which prevent patients from producing a particular protein. By manufacturing the missing protein and providing it to the patients, BioMarin helps to improve life expectancy and quality.

From an investor perspective, the orphan disease business model is attractive, because drug development is less costly the small number of sufferers means that clinical trials require fewer patients and so development time is shorter. These drugs also command a premium price.

BioMarin currently has five drugs on the market, for diseases such as phenylketonuria and Morquio A syndrome. It has another seven in development.

The shares usually trade at higher sales and profit ratios, but these valuations can be justified because of the nature of the products because patients have to continue to take the drug over their lifespans, they provide a reliable, long-term income stream if the drug is successful.

Chimerix (Nasdaq: CMRX) has only one drug in development brincidofovir. It's an anti-viral which could be used to treat a range of infections. Importantly, if proven in clinical trials, it might reduce mortality in patients undergoing bone marrow transplantation, where certain viral infections can be deadly.

Brincidofovir is an improved version of an existing drug, which means the mechanism of action is well understood. The older drug is not that effective and relatively toxic to kidneys brincidofovir has a better safety profile.

This focus on improving an existing therapeutic area makes Chimerix a less risky proposition than other one-drug stocks. It has also been used on Ebola patients, but has not yet been through full clinical trials Chimerix is working with American public-health institutions to develop the drug for use against Ebola.