Many biotech companies may flame out as the cost of money rises, but these three can survive and prosper
3h ago · By John Blankenhorn, InvestorPlace Contributor
- As interest rates rise, companies that have to take on loans will falter, while those will lots of cash will rise.
- Gilead Sciences (GILD): Plenty of cash on hand, which is important, given the company’s growth-by-acquisition model.
- Vertex Pharmaceuticals (VRTX): A big investment in what could be the hottest biotechnology of the decade is worth investing in.
- Moderna (MRNA): Has an enviable post-pandemic war chest, and an mRNA pipeline that promises to bring future successes.
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The Federal Reserve’s recent interest rate hikes mean banks charge much higher interest rates for loans. The interest on loans can be considered the price of borrowing more money. And since acquiring cash now costs more money, it’s becoming much more complicated for companies to invest. For biotech stocks, the pain is clearly borne by investors, who choose to dive into these capital-intensive businesses.
For a cash-strapped company, the rising cost of money can be a death sentence. But cash-rich biotech stocks can safely weather the storm. With ample reserves, they won’t need to pay for more money and can remain insulated from rising interest rates. And with competitors going bankrupt or reigning in expenses, they can expand more efficiently. In this way, a cash-rich biotech stock can deliver safety and growth over its competitors.
Cash alone isn’t enough, of course. A good company needs current solid revenue and a path towards future profitability. And it should have a proven history of using their cash well. But biotech stocks with strong cash positions will be the safest bets you can find going forward. They’ll lead in developing the newest cures and perhaps even buying up the competitors.
So, without further ado, here are three that should be on any biotech investor’s radar.
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Gilead Sciences (GILD)
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Gilead Sciences (NASDAQ:GILD) has a laundry list of successful medicines against everything from HIV to cancer. They were notably buoyed during the pandemic by the success of Remdesivir, a COVID-19 antiviral drug. That success and others have put the company in a strong position as of late. Gilead’s 2022 earnings showed the company held $5.4 billion in cash and brought in $4.5 billion in net income. That puts Gilead in a strong financial position relative to its peers.
Gilead is also a good bet because the company has a history of knowing what to do with their money. In 2011, Gilead purchased Pharmasset for $11 billion, giving the company access to the hepatitis C drug Solvadi. And in 2017, the Pharma giant bought Kite Pharma for $12 billion, giving the company access to the CAR-T cell therapy Yescarta. These acquisitions show that Gilead knows how to deploy its money effectively. Indeed, Gilead will likely find many additional buying opportunities, as other biotech companies struggle to survive.
Gilead is in an enviable position in the current market. Its proven drugs are providing lots of revenue. Its drug pipeline promises future earnings growth. And its solid financial base means it can fund its pipeline, and buy out others if need be. Finally, it has a track record of doing this successfully for years. As the tide goes out, you can be sure Gilead is swimming with its trunks on.
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Vertex Pharmaceuticals (VRTX)
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Vertex Pharmaceuticals (NASDAQ:VRTX) is primarily known for its cystic fibrosis drugs. But they company has also positioned itself to be a leader in CRISPR/Cas9 drugs. Vertex is partnering with CRISPR Therapeutics (NASDAQ:CRSP) to deliver what could be the first FDA-approved CRISPR/Cas9 drug, CTX001, to market. It managed to get to this position by maintaining a solid cash position, and knowing where to spend it.
Vertex’s earnings report shows the company ended 2022 with $10.5 billion in cash and cash equivalents. Additionally, it had $8.9 billion in revenue and $3.3 billion in expenses. Vertex has built a war chest, and has plenty of ways to deploy it. If CTX001 does set off a storm of research into other CRISPR-Cas9 drugs, much of that research may be performed in smaller biotech companies that Vertex can buy up. Or Vertex can ink similar deals to the one it has with CRISRPR Therapeutics, in which Vertex pays cash now to get most of the future profits. Those are the kinds of sales you can only afford when you can access a lot of money like Vertex.
Ultimately Vertex looks like a great company with consistent growth and vast potential. Vertex’s cystic fibrosis patients will last much of the remaining decade. And even when these drugs run their course, its pipeline can deliver more drugs to replace the winners. Finally, its prominent cash position means it can afford to keep firing on all cylinders, while also taking the lead in the newest technologies, like CRISPR-Cas9.
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Moderna (MRNA)
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Moderna (NASDAQ:MRNA) did very well during the pandemic. Its vaccine was the second-most used in America, providing the company with impressive revenue and a large cash reserve. After the pandemic, Moderna must now pivot to become among the more diversified biotech stocks, producing non-COVID-related vaccines. However, considering Moderna’s mRNA pipeline is now built on proven technology, I think this makes MRNA stock a buy, for those looking to play some of the most cutting-edge vaccines being trialed.
Moderna’s current pipeline involves studying many vaccines used against viruses that have proven elusive against other therapies. Moderna’s team hopes mRNA vaccines can be the key to targets like HIV and Zika. The company is also targeting non-virus diseases such as cancer and autoimmune diseases. Not all clinical trials will succeed; just look at their recently failed flu vaccine. But Moderna has the money to keep trying, and the expertise to succeed eventually.
The best argument in Moderna’s favor comes from their most recent earnings report. The company has a large cushion for their research ,with $3.2 billion in cash and cash equivalents plus more in investments. Moderna earned $8.3 billion in net income, which will likely decrease substantially now that fewer people are getting COVID. But the cash they’ve made from this vaccine, and the capital they’ve subsequently acquired, provides investors with a visible path to growth. At least some of Moderna’s vaccines are likely to be hit, and even if they don’t become COVID-sized hits, Moderna will remain a safe and profitable investment, while cash-strapped companies fail around them.
On the date of publication, John Blankenhorn did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
John Blankenhorn is a neuroscientist at Emory University. He has significant experience in biochemistry, biotechnology and pharmaceutical research.