Four promising biotech stocks to buy now

The recent correction in biotech stocks was overdone, says professional investor Dr Daniel Koller. Here, he picks four biotech companies to buy now.

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Dr Daniel Koller, head of the BB Biotech management team.

Investors have been nervous over bubbly biotechnology stocks, but the recent market correction was overdone. Current stock prices offer attractive entry points, as the fundamentals of the business remain unchanged and strong. Forty-one new medicines were brought to market in 2014, the highest number since the record year of 1996, and most of them came from biotech laboratories. Thirty to forty new products a year are expected to be approved in the US and Europe between now and 2018, with effort concentrated on diseases that occur with advancing age such as cancer, arthritis and Alzheimer's and on illnesses such as hepatitis, multiple sclerosis or rare genetic disorders for which there are no or inadequate treatments. Of all the branches of health, investors can expect biotechnology to have the highest growth in profits in the coming years. Stock valuations reflect this.

Gilead Sciences (Nasdaq: GILD), the biotech with the largest market capitalisation in its sector, has the lowest price/earnings (p/e) ratio (8.5) of all the majors. Investors are sceptical about the sustainability of sales growth for its hepatitis C treatments Sovaldi and Harvoni. But I think the potential for growth has been underestimated, given the potential for Gilead's drugs to treat other diseases of the liver such as hepatitis B and non-alcoholic steatohepatitis (NASH). In 2015, Gilead will generate a flow of funds that is estimated to be higher than pharmaceutical giants Novartis and Roche (trading on p/es of around 16-17), for example, and yet it trades on a considerably lower valuation. It may use its cash flow of $5bn-$6bn per quarter for acquisitions if necessary, snapping up firms with new technologies or products close to launch.

Celgene (Nasdaq: CELG) is another successful biotech. The US company has the highest valuation of the four largest biotech companies, but will provide profit growth rates of 25% to 30% over the coming years. Again, investors have been sceptical, not least due to a disputed patent for the multiple myeloma drug Revlimid, the bestselling medicine and largest profit driver of Celgene by far. But now these concerns have been dispelled the patents may be maintained until 2023 in Europe and until 2025 in the US. Celgene has also followed an aggressive strategy for acquisitions and product development over the past five years.

The picture looks different for medium-sized biotechs however those that have a stockmarket value in the region of several billion dollars. Prices have surged recently as investors dream of takeovers by a major pharmaceutical or biotech rival. Investors should tread carefully here. Products in the early stages of testing have been assessed very positively you'd have to be very confident that these speculative therapies will win approval later to expect any rise in share prices from here. The same applies to most of a growing number of newcomers on the stockmarket. Gene therapies are one such area, where early high expectations were followed by price falls. Investors would be well advised to wait for proof of effectiveness before buying in. An example is chimeric antigen receptor (CAR) T-cell technology in cancer, where the body's own immune defence is activated in order to fight tumour cells. Here Kite Pharma (Nasdaq: KITE) and Juno Therapeutics (Nasdaq: JUNO) are well placed to benefit should future clinical trials besuccessful.

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