Profitable pills: where to find the best biotech stocks

A professional investor tells us where he'd put his money. This week: Marek Poszepczynski of the International Biotechnology Trust highlights three top biotech stocks.

Biotechnology is rightly classified as a growth sector, but not all companies have the same earnings potential. The drugs addressing the highest unmet medical needs tend to produce significant profits and consistent cash flows. Products that either cure a previously untreatable disease or improve patients' quality of life will sell well and are more likely to benefit from reimbursements by governments and health insurers.

Ideally, the product should be able to maintain a dominant position in its therapeutic area for a long period of time. A company is better able to protect its drug pricing and profitability if it faces fewer competitors. We have selected three stocks to fit these criteria, each with a different risk profile to cater for a variety of risk appetites.

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Help for HIV and hepatitis patients

Gilead (Nasdaq: GILD)

But while the overall outlook for Gilead is robust, investors should be aware that the growth potential for this company is slowing as it is hard for such a large firm to expand rapidly. Investors with a higher risk appetite could look to smaller, faster-growing firms such as Vertex or Insmed.

The gold-standard cystic fibrosis drug

Vertex (Nasdaq: VRTX)

As this disease only affects a relatively small number of patients, the company has received orphan-drug status (this is granted to treatments for rare diseases). This allows Vertex to charge a high price for its product and the portfolio is also shielded from competition by Vertex's intellectual-property rights.

A crucial antibiotic

Insmed

(Nasdaq: INSM)

Investing in the antibiotic space has been tough in recent years despite the clear and growing unmet need. However, Insmed has succeeded in developing and launching Arikayce. Initial sales look robust.