Why do hedge funds recommend these biotech stocks?

We recently made a list The 12 Best Biotech Stocks to Invest In, According to Hedge Funds. In this article, we’ll take a look at how Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) stacks up against other biotech stocks.

As we mentioned in our article, “10 Best Penny Stocks to Buy Under $1The global biotechnology industry is estimated to be worth $1.38 trillion in 2023, growing at a CAGR of 11.8% between 2024 and 2033 to reach approximately $4.25 trillion.

More specifically, the US biotechnology market was forecasted to be $246.18 billion last year, and at a CAGR of 11.6% from 2024 to 2034, according to Precence Research, it will be worth around $830.31 billion. North America’s revenue share was 37.79%, while Asia Pacific generated a revenue share of 23.99%. In terms of revenue share by application, the biopharma segment accounted for 41.73% in 2023, and the bioindustrial applications segment accounted for 24.33% of total revenue. In terms of technology, the tissue engineering and regeneration market forecasted a 19.26% revenue share for 2023.

According to stock analysis, there are 665 companies in the biotechnology industry with a combined market value of $1,559.75 billion and total sales of $127.6 billion.

But approval decisions by the U.S. Food and Drug Administration and other drug regulators, as well as research results, have a significant impact on the future of these sometimes volatile stocks.

Investing in biotech stocks has always required a high risk tolerance and the ability to wait years, even decades, for results. Biotech investors’ resilience has been tested by inconsistent performance in recent years and so far this year. According to Morningstar strategist Karen Andersen, biotech had a strong start to 2024, fueled by a surge in M&A activity and signs that interest rates were starting to fall. However, the second quarter of 2024 was more mixed for the industry, with rates appearing to stabilize rather than fall, despite ongoing (but improving) inflation. Higher rates tend to discourage investors from waiting for unclear returns on biotech investments.

Andersen sees much promise in biotechnology, as well as room for expansion, despite recent mixed results, stating:

“We continue to see favorable winds for the industry going forward. Smaller companies continue to be targets for acquisitions by larger biopharma companies, and a wave of acquisitions has been underway since late last year, particularly in oncology and immunology,” “We believe that acquisitions in obesity are likely to continue, as large biopharma companies can bring development and commercialization expertise to many of the programs in mid-stage trials at smaller biotech companies. Second, at a more fundamental level, new technologies and new therapeutic area launches are poised to drive productivity and drive biotech efficiency.”

What’s more, the report “Future of Biotech AI-driven Drug Discovery” states that AI has the potential to drastically accelerate drug research, shortening development timelines from decades to a matter of years. By integrating artificial intelligence (AI) into drug development and biology, scientists can create tailored therapies for patients. Rather than replacing scientists, AI will augment their skills, allowing them to automate repetitive tasks and generate new insights. Companies need to move from siloed pilots to a complete data-driven approach, integrating analytics into decision-making and emphasizing rapid, observable results that help patients and the scientific method to properly leverage AI.

Today, more than 450 life sciences companies, classified as “startups” or “scaleups,” are actively leveraging predictive and generative capabilities based on machine learning and deep learning to advance their research strategies, according to BioPharmaTrend’s “The State of Artificial Intelligence (AI) in Biopharma.”

Fitch Ratings continues to maintain a neutral outlook on the global biotech industry in 2024. Despite rising interest rates, it expects growth driven by demographic trends and innovation. Although they face headwinds in investment and regulation, Fitch emphasizes that companies are focusing more on research and development, as well as strategic changes that improve drug pricing.

Methodology:

We scoured biotech ETF holdings and online rankings to come up with a preliminary list of 20 biotech stocks. We then selected the 12 stocks that were most popular with institutional investors. The stocks are ranked in ascending order of the number of hedge funds that hold a stake in them, as of the second quarter of 2024.

Why are we interested in the stocks that hedge funds invest in? The reason is simple: Our research has shown that we can outperform the market by mimicking the top stock picks of the best hedge funds. Our quarterly newsletter strategy selects 14 small- and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (See more details here)

A pharmacist supplying a specific medication to a patient in a specialist pharmacy.

Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX)

Number of hedge fund holders: 59

Global biotechnology company Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) is widely known for its broad product portfolio, which, in addition to treating cystic fibrosis, includes gene editing, non-opioid pain medications, and potential treatments for type 1 diabetes and renal disease.

The biotech company is best known for developing the hepatitis C drug Incivek, a blockbuster that has since been overshadowed by the company’s successful cystic fibrosis (CF) franchise. If global and pediatric approvals are obtained for Vertex’s licensed CF drugs, Orkambi, Symdeko, Kalydeco, and Trikafta, the company will be able to treat about 90% of the population with CF.

Given the long patent life, high efficacy of its treatments and lack of competition in the CF market, the Company is expected to continue to dominate the market while seeking candidates for its portfolio in other rare indications to increase revenues.

In addition, VRTX introduced Casgevy, the first FDA-approved CRISPR gene-editing therapeutic for sickle cell disease and beta-thalassemia. Suzetrigine (VX-548), a promising non-opioid pain reliever with significant commercial potential, is awaiting FDA approval.

However, Vertex Pharmaceuticals Incorporated’s (NASDAQ:VRTX) diversification opportunities could be limited if its other product candidates prove unsuccessful, as the company’s business is heavily dependent on the success of its cystic fibrosis trademark.

The company’s second-quarter 2024 results fell short of analyst expectations. Overall, Vertex continues to see success with its diversified pipeline, as evidenced by product revenue of $2.65 billion, up 6% from the same quarter last year. The biotech’s triple combination cystic fibrosis drug, Trikafta/Kaftrio, saw strong demand, with sales of $2.45 billion.

VRTX is one of the Best Biotech Stocks to Invest In, According to Hedge Funds and among hedge funds, sentiment is 59 in the second quarter of 2024. Derrick Tang’s Kynam Capital is the company’s largest shareholder, with 330,000 shares worth $154.68 million.

Total VRTX takes 7th place on our list of the best biotech stocks to buy according to hedge funds. While we recognize VRTX’s potential as an investment, our conviction is based on the belief that some AI stocks offer greater promise for higher returns, and in a shorter time frame. If you’re looking for an AI stock that’s more promising than VRTX but is trading at less than 5 times earnings, check out our report on cheapest AI action.

READ MORE: $30 Trillion Opportunity: The 15 Best Humanoid Robot Stocks to Buy, According to Morgan Stanley AND Jim Cramer says NVIDIA has ‘become a wasteland’.

Disclosure: None. This article was originally published on Insider Monkey.