You might not have noticed, but biotech stocks as a group are pretty hot right now. Over the past month, the SPDR S&P Biotech ETF has soared nearly 22%. That gain is more than three times greater than the increase for the S&P 500 Index during the same period.
But ETFs by nature include both leaders and laggards. It would be great to only invest in biotech stocks that have strong growth prospects and not those that are much riskier. There are several biotech stocks that fit the bill. Here are three that I think especially stand out as great picks to buy in May.
1. Vertex Pharmaceuticals
Imagine a biotech that commands a virtual monopoly in its market. A biotech with tremendous growth potential in that market. A biotech with pipeline candidates that could be game-changers. A biotech with a boatload of cash to invest in other growth opportunities. There's no need to use your imagination: Vertex Pharmaceuticals (NASDAQ:VRTX) is such a biotech.
The company markets the only approved drugs that treat the underlying cause of rare genetic disease cystic fibrosis (CF). Vertex's lineup includes four CF drugs approved in the United States. Three of them are approved in Europe as well with the fourth awaiting approval. No other drugmaker has a CF candidate that treats the cause of the disease beyond mid-stage clinical testing.
Vertex's newest CF drug, Trikafta, won FDA approval five months earlier than scheduled, something that you'll rarely see. Assuming it wins European approval, which is a pretty good bet, Trikafta could expand the company's addressable patient population by more than 50%. Meanwhile, Vertex's recent reimbursement deals for its other CF drugs in key markets give it a nice runway for growth.
The biotech's pipeline includes another triple-drug combo for treating CF, a pain drug, and two candidates targeting rare genetic diseases alpha-1 antitrypsin deficiency (AATD) and focal segmental glomerulosclerosis (FSGS) in phase 2 testing. Vertex's early stage candidates include a gene-editing therapy targeting rare blood diseases beta-thalassemia and sickle cell disease that's being developed in partnership with CRISPR Therapeutics.
As for a boatload of cash, Vertex has a cash position of $4.2 billion. It already put some of its cash to work last year with the acquisition of Semma Therapeutics for $950 million. This deal brought Semma's potential cure for type 1 diabetes into Vertex's pipeline. The big biotech plans to advance the candidate into an early stage clinical study by early 2021.
2. Gilead Sciences
The story isn't all that different for Gilead Sciences (NASDAQ:GILD). Sure, Gilead doesn't have a virtual monopoly like Vertex does. However, the big biotech dominates the HIV market. It also has a leading market share in the hepatitis C virus (HCV) market in a duopoly with AbbVie.
Gilead has been the center of attention in 2020, though, because of its antiviral drug remdesivir. The drug recently became the first treatment for COVID-19 to win emergency use authorization from the FDA. It seems likely that remdesivir will quickly become the standard of care for treating the novel coronavirus disease.
Are there other potential game-changers in Gilead's pipeline? You bet. The company awaits U.S. and European approvals for filgotinib in treating rheumatoid arthritis. Gilead is evaluating a long-acting HIV therapy in phase 2 testing that could dramatically change how the disease is treated.
It also has a couple of potential HIV cures in early stage clinical studies. In addition, the biotech's pipeline includes promising cancer cell therapies and drugs that could potentially treat nonalcoholic steatohepatitis (NASH), a disease that currently has no approved drugs.
If you're looking for a lot of cash, Gilead certainly has it. The company reported $24.3 billion in cash, cash equivalents, and marketable securities as of March 31, 2020. That cash stockpile is a little lower now, though: Gilead acquired cancer-focused biotech Forty Seven in April for $4.9 billion.
Let's now go in a much different direction. Novavax (NASDAQ:NVAX) doesn't have a monopoly. It doesn't have a lot of cash. The small biotech doesn't even have an approved drug on the market yet. But what Novavax does have in common with Vertex and Gilead is tremendous growth potential and at least one possible game-changer in its pipeline.
Novavax announced really great results in March from a late-stage study of experimental flu vaccine NanoFlu. The nanoparticle-based vaccine went head-to-head against Sanofi's approved flu vaccine FluZone Quadrivalent. And NanoFlu appeared to beat Sanofi's market-leading vaccine in the clinical trial.
Like Gilead, Novavax could be a winner in the fight against COVID-19. The company expects to begin an early stage clinical study evaluating its experimental coronavirus vaccine candidate NVX-CoV2373 within a matter of days. Preclinical testing of the vaccine demonstrated promising results.
NanoFlu could easily generate peak annual sales of more than $500 million and could become a blockbuster if it's approved. With Novavax's market cap currently only a little over $1 billion, the stock has plenty of upside potential.
Novavax is certainly riskier than either Vertex or Gilead are. But it could also be the biggest winner of the three over the next couple of years.