Five top biotech innovators

Professional investor Dr Daniel Koller picks five innovative biotech stocks to buy now.

Each week, a professional investor tells us where he'd put his money. This week:Dr Daniel Koller, lead manager of BB Biotech.

The last decade saw biotechnology industry sales rise from $6bn to $131bn, driven principally by a new generation of discoveries enabling biotechs to bring industry-changing products to market. These technological advances and the number of new drug approvals have led to powerful growth in the number of companies making a profit. Positive data from recent clinical trials indicate that there's plenty more to come.

Why then has 2016 seen biotech stocks underperforming general equity markets by 20%? Various factors were at play, but politics has hit sentiment hard. Healthcare stocks and the drug industry, including biotech, have already endured punishment at the hands of Democratic nominee Hillary Clinton, with drug prices being a pillar of her campaign. As expectations of a Clinton victory increased in recent weeks, biotech stocks were hit once again. These discussions will continue until early 2017, when the newly elected US president announces her or his future healthcare policy plans.

But political criticism is often aimed at the list price and ignores that high growth rates are generated by volume. New drugs make it possible to treat far more patients than before, and the final level of sales is correspondingly high. Thus any discussion about the price of a drug should revolve first and foremost around its medical value or benefit to patients and society.

BB Biotech, the fund I manage, remains focused on biotech firms offering innovation that promises to improve treatment for serious diseases. Companies of particular interest include Radius Health (Nasdaq: RDUS), Cempra (Nasdaq: CEMP) and Vertex Pharmaceuticals (Nasdaq: VRTX). They have all made progress with their main drugs in development: Radius's treatment for postmenopausal women with osteoporosis is in for New Drug Application (NDA) approval in the US; Cempra submitted its NDA for a drug to treat community-acquired bacterial pneumonia; Vertex is testing a key triple combination to treat cystic fibrosis.

With one of the weakest years of results now behind us, we expect a return to growth for the sector. Product approvals and results from key clinical trials offer the potential for growth in valuations for the remaining months of 2016 and into 2017. Many large pharmaceutical and biotechnology companies are looking to mergers and acquisitions and industry consolidation, and the number of profitable biotechs is steadily growing. We are maintaining our current approach of building a portfolio of a small number of core holdings, plusmid- and small caps with the potential to grow faster than the market. Companies in their growth phase that are poised to become large caps, such asActelion(Zurich: ATLN) or Incyte (Nasdaq: INCY), are particularly attractive.

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