Vaccines, pharmaceuticals, and other health-related topics, products, and services are all the rage right now after the pandemic has created massive opportunities for life sciences companies that develop treatments and vaccines for Covid-19. But which are the best life sciences stocks to buy?
What Are Life Sciences Stocks?
Life sciences is a term that refers to the study of living organisms, including:
- And more
With such a broad definition, it’s easy to see why so many companies fit into the life sciences categories, including companies that develop and market the following:
- Medical devices
- Biological products
- Diagnosis systems
- Gene-sequencing systems
Top 5 Life Sciences Stocks to Buy
Johnson & Johnson (JNJ)
J&J is the largest life sciences company in the world. So, if you’re going to invest in life sciences, there’s no better place to start. Johnson & Johnson (JNJ) manufactures a broad spectrum of health products, including Band-Aids, Motrin, Benadryl, Tylenol, and Visine. It also manufactures medical devices and pharmaceuticals, including a Covid-19 vaccine.
Despite recent issues with the Johnson & Johnson vaccine, since the company manufactures such a vast array of products, it’s still a great stock to invest in. In fact, J&J has increased its dividend for 58 consecutive years. Can you say Dividend King?
Moderna (MRNA) was catapulted onto the global stage during the Covid-19 pandemic as it rushed to develop a vaccine. In December 2020, the company successfully launched its vaccine mRNA-1273, becoming the second company in the United States to win Emergency Use Authorization.
Moderna supplies its vaccine to nearly 100 countries worldwide, and the U.S. government committed to the purchase of 500 million vaccine doses in 2021 and 2022.
In 2021 alone, it’s expected that Moderna will make $18 billion in sales from its Covid vaccine. Although it’s hard to tell whether or not a vaccine will have strong recurring revenue, boosters are now being strongly urged, generating more revenue for Moderna.
What’s more, the pharmaceutical giant’s messenger RNA (mRNA) technology could also be successful in other applications, including cancer and coronary heart disease.
Abbott Laboratories (ABT)
Abbot Labs’ (ABT) products stretch across a few life sciences areas, including:
- Medical devices
- Nutrition products
- Pharmaceutical drugs
One of the primary drivers of Abbot’s growth is FreeStyle Libre continuous glucose monitoring system (CGM) — you’ve likely seen or heard a commercial for this wildly popular device.
The company also has several other products that are igniting its growth, most notably its MitraClip heart valve device.
What’s more, Abbott Laboratories even manufactures Covid-19 tests, something that’s particularly important during the current Omicron variant surge.
Abbot is a Dividend Aristocrat and has paid a dividend every quarter since 1924. It’s also increased its dividend each year for 49 years.
Vertex Pharmaceuticals (VRTX)
Vertex Pharmaceuticals (VRTX) is an industry leader in the treatment of cystic fibrosis’ underlying cause. Vertex manufactures four drugs for cystic fibrosis currently:
Cystic Fibrosis has massive market potential. Research has found the market will grow to reach a value of nearly $14 billion by 2025.
After launching in late 2019, Trikafta/Kaftrio was an instant hit among CF patients and won European approval in August of the following year.
The company should enjoy steady sales growth with the launch of its newest cystic fibrosis drug in individual European nations. The launch of Trikafta/Kaftrio could expand the company’s addressable CF patient population by over 50%.
Furthermore, Vertex is already turning a profit, meaning it has an abundance of cash to put towards strengthening its product offerings.
What’s more, Vertex wants to expand beyond cystic fibrosis with phase two programs that target pain and kidney diseases that are caused by specific gene mutations. And, the company is also in the midst of pursuing an early-stage development program with its partner CRISPR Therapeutics (CRSP). This program would test gene-editing therapies targeting beta-thalassemia and sickle cell disease — two rare blood diseases.
Additionally, the company has advanced clinical testing of another experimental drug with the potential to cure type 1 diabetes.
Utah Medical Products (UTMD)
Utah Medical Products (UTMD) manufactures, develops, and markets disposable and reusable medical devices, particularly for women and babies.
These products are used for a range of functions, including:
- Blood pressure monitoring
- Blood collection
- Neonatal critical care
Investing in Life Sciences Stocks: Worth the Risk?
Investing in life sciences is considered a risky proposition by some. This is because of the uncertain path to regulation that these companies and their products face.
Here’s a look at how the regulatory process works. It’s important for investors to pay attention to which phase a drug company’s drug candidate is in so you can make a well-informed decision on whether or not to invest.
There are four steps and three phases that take place during drug development:
- Drug discovery — First, a biotech or life sciences company must find and/or identify a drug candidate and the disease it aims to treat.
- Pre-clinical testing — Next, the company must test the drug candidates, this can take place in test tubes or in animals, like mice.
- Clinical testing —If pre-clinical testing is a success, the company will then test the drug candidate on humans. This stage happens in the following phases:
- Phase 1: Small studies take place in order to find a safe drug dosage and figure out its effects on humans.
- Phase 2: Bigger studies take place with 100+ people. These studies are focused on the safety and short-term side effects of the candidate drug(s).
- Phase 3: The biggest studies take place during this phase — sometimes thousands of people are studied to demonstrate how effectively and safely the candidate drug treats its intended disease.
- Regulatory approval — The final step is regulatory approval which must be obtained before a company can start marketing and selling a drug. The company must file for regulatory approval with the FDA. It also submits clinical testing data.
Since most biotech and life sciences companies have several drugs under development at once, they’re able to have access to multiple streams of income. So, the best life sciences investments are not just focused on one or two experimental drugs.
As they grow, many life sciences companies often generate cash through the issuance of new stock shares. This dilutes the value of current stock shares.
It’s also important to remember that some life sciences companies receive and are dependent on money that is given to them through partnerships with larger drug manufacturers or grants from non-profits and government organizations.
What’s more, mergers and acquisitions are commonly seen in this industry. This means that even the most promising life sciences company — and its stock — can be acquired seemingly out of nowhere, though usually this is a boon to existing shareholders.
If you invest heavily into a life sciences stock before the drug passes regulatory approval, and it fails, you’ll find yourself in a less-than-desirable spot. But, it’s not only commercial success that catapults products to market. A lot of life sciences companies have to be reimbursed by the government and/or private citizens.
This process is challenging and takes a lot of time, and even allows rival companies to catch up and bypass the first company and therefore capture a significant portion of the market share before company A can even get approved by the FDA.
The bottom line is that the later in the company’s life cycle you invest the more likely your return will be lower. A company like Johnson & Johnson will have many diversified revenue streams while Moderna is tethered largely to the success of one vaccine now.
So, instead of focusing on the massive upside return potential for a company that is less well diversified, pay attention to the risk-adjusted return. Once you factor in the downside potential, you’ll make smarter investment decisions.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.