Biotech Investing Guide: 3 Stocks To Buy And 3 To Avoid

The biotech sector, which has outperformed over the last few years, has not exactly had a great start this year -- the Nasdaq Biotechnology Index is down 22.2% year-to-date. Compare this to 11.9% growth during the same period last year and one wonders whether the dream run for the sector is over.

The sector has been under immense pressure over the last few months thanks to the increasing political and media focus on high price tags for new drugs as well as the changing competitive scenario.

Last year, the FDA approved the first biosimilar in the U.S., opening the floodgates for additional such products to enter the market. Several companies are currently working on bringing in biosimilar versions of multi-billion dollar revenue-generating products like Enbrel and Humira among others.

Meanwhile, the drug pricing issue is not likely to die down easily – at least not until election is over. While presidential candidates may have differing opinions about other issues, all are pretty much on the same page where the high prices of drugs are concerned. Proposed health care plans include suggestions on how to rein in the prices of new drugs.

Is it all Bad News for the Biotech Sector?

Not really -- fundamentals remain strong with companies like Gilead, AbbVie (ABBV - Analyst Report) and Amgen continuing to deliver on their pipeline while key products continue to perform well. With valuations approaching reasonable levels, we could see several merger and acquisition (M&As) agreements being announced as the year progresses. Quite a few of the major biotech companies are rumored to be on the look-out for suitable deals.

Moreover, biotech companies continue to work on bringing innovative new treatments to market and there could be significant catalysts this year in the form of important new product approvals as well as major data read-outs. Sales of products that gained approval last year as well as line extensions should ramp up this year and boost growth. Some recently approved products with blockbuster potential include Vertex’s cystic fibrosis treatment, Orkambi, Amgen’s PCSK9 inhibitor, Repatha, Regeneron/Sanofi’s PCSK9 inhibitor Praluent and Gilead’s Genvoya (HIV). Cancer treatments like Kyprolis and Imbruvica should also bring in more sales thanks to label expansions.

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