Let's face it: Biotech stocks as a group didn't perform all that great in 2018. There were exceptions, of course, but overall, biotech stocks underperformed the S&P 500 index by a significant margin last year.
But that doesn't mean 2019 won't be much better for biotech stocks. And, as was the case in 2018, there are always winners regardless of what happens with the broader market or with the biotech industry overall.
We asked three of our top healthcare contributors to pick out which biotech stocks they like right now. They chose Celgene (NASDAQ: CELG) , Ionis Pharmaceuticals (NASDAQ: IONS) , and Viking Therapeutics (NASDAQ: VKTX) . Here's why these three biotech stocks are top picks to buy in January.
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A potential win-win-win scenario
Sean Williams (Celgene): Sure, Bristol-Myers Squibb (NYSE: BMY) shocked Wall Street when it agreed to purchase Celgene for about $74 billion earlier this month, but that doesn't mean there isn't a potential all-around winning scenario on the horizon for Celgene's shareholders.
The deal will combine Bristol-Myers' and Celgene's core oncology and immunology segments, save the duo $2.5 billion through cost synergies by 2022, and put some of the most powerful blockbuster drugs under one roof. This would include Celgene's multiple myeloma powerhouse Revlimid, which could soon become the top-selling drug in the world on an annual basis, as well as Bristol-Myers' blood thinner Eliquis and immunotherapy Opdivo.
Under the terms of the merger , Celgene's shareholders would receive $50 in cash; one share of Bristol-Myers Squibb, which closed at $52.43 when the deal was announced; and a contingent value right (CVR) that would entitle Celgene shareholders an additional $9 per share if three developing drugs meet their regulatory milestones between Dec. 31, 2020, and March 31, 2021. Even if the CVR isn't met, and basing this on the reduced Bristol-Myers share price following the announcement, Celgene shareholders are on track to receive $96.89 per share, through this past weekend. That's an arbitrage opportunity of 14%, and a win based on Celgene's current share price.
But who's to say this is the only offer Celgene receives? Considering how much free cash flow could be generated from Revlimid, Otezla, and future therapies such as ozanimod -- which, when approved, could bring in between $4 billion and $6 billion per year -- it's possible Celgene finds another suitor in the Big Pharma realm that would offer even more.
Even if shareholders of one or both companies failed to approve the deal, or if regulators denied the merger, Celgene shareholders could still come out ahead over the long run . We're talking about a company that was valued at less than 6 times its forward price-to-earnings before the deal announcement, and which is expected to generate around $20 billion in sales and more than $12.50 in earnings per share by 2020.
By all accounts, Celgene is inexpensive, and its lead drug, Revlimid, is protected from a flood of generic competition until the midpoint of the next decade. No matter how you slice it, Celgene's shareholders are in a winning scenario right now.
Flipping to profitability
Brian Feroldi ( Ionis Pharmaceuticals ): A simple way biotech investors can reduce their risk is to only invest in companies that have already achieved profitability. While Ionis Pharmaceuticals isn't quite there yet, it's only a quarter or two away from being consistently profitable. That's a situation that excites me.
Ionis is a biotech that specializes in RNA-targeted medicines. The company has developed a unique drug development platform that allows it to rapidly create new products that target a range of diseases. Ionis has a long history of partnering with deep-pocketed pharma companies such as Biogen , Bayer , and Novartis to help fund the R&D process.
Ionis has a huge pipeline of drugs in development, and it has already crossed the finish line with three products. Spinraza, which is a treatment for spinal muscular atrophy, looks to be a megahit -- and Ionis is starting to generate a meaningful amount of revenue from its sales. When combined with regular payments from its partnership programs, the company has built up a bank balance of $2 billion, while its quarterly net loss remains negligible.
Investors should expect big things over the next few years from Ionis. Sales of its already-approved drugs should grow quickly. Another drug, Waylivra, is currently pending regulatory review. Beyond that, the company counts more than 10 other programs in late-stage development that could be on the market within the next five years. While success is never guaranteed, I like that Ionis has a history of getting its products across the finish line.
In total, Ionis offers investors a winning drug development platform and the potential for growth both now and in the future. That's a combination that should excite biotech investors
Big things ahead
Keith Speights (Viking Therapeutics): I think there are three reasons to put Viking Therapeutics on your radar screen for January.
First, the biotech's overwhelmingly positive phase 2 results for experimental drug VK2809 in treating non-alcoholic fatty liver disease (NAFLD) and high low-density lipoprotein cholesterol generated tremendous excitement. Investors eagerly await seeing Viking advance the drug into clinical studies targeting a specific type of NAFLD -- non-alcoholic steatohepatitis (NASH).
Second, unlike most clinical-stage biotechs, Viking's pipeline includes a second promising candidate. VK5211 looked great in a phase 2 study evaluating the drug in helping patients recover from hip fracture. Viking could find a partner to take the drug into late-stage testing.
Third, Viking should be one of the top small biotechs on the lists of potential acquisition targets for larger drugmakers. NASH is a hot space to be in right now, with several Big Pharma companies and big biotechs scrambling to enter what is expected to be a $35 billion market in the future. Viking's success with VK2809 could attract interest from multiple players.
With its market cap only around $600 million, the potential for VK2809 and VK5211 give Viking a pretty good risk-reward profile, in my view. Big things lie ahead for the small biotech -- and they could translate to big returns for aggressive investors.
10 stocks we like better than Celgene
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Brian Feroldi owns shares of Celgene and Ionis Pharmaceuticals. Keith Speights owns shares of Celgene. Sean Williams owns shares of Celgene. The Motley Fool owns shares of and recommends Biogen, Celgene, and Ionis Pharmaceuticals. The Motley Fool has a disclosure policy .