3 Top Biotech Picks for 2021 - Motley Fool

If you want sizzling returns, look no further than the biotech industry. The SPDR S&P Biotech ETF (NYSEMKT:XBI) -- a pretty good barometer for biotechs -- delivered a 48% gain last year. That marked the best performance for the ETF since 2013, when it soared by roughly the same amount. In six of the last 10 years, the biotech ETF generated a return of at least 30%.

Investing in this ETF is a great way to profit from the momentum for biotech stocks. However, you can potentially come out even better by going with individual stocks with tremendous potential. Here are three top biotech picks for 2021 that especially stand out.

A rack of test tubes with increasingly higher levels of green liquid in each test tube with a green arrow in the background sloping upward

Image source: Getty Images.

1. Vertex Pharmaceuticals

You'll be hard-pressed to find a stronger biotech than Vertex Pharmaceuticals (NASDAQ:VRTX). The company pretty much has it all, notably including a strong moat and multiple paths for growth.

Let's start with Vertex's moat. The biotech practically owns the cystic fibrosis (CF) market with four approved drugs that treat the underlying cause of the genetic disease. Vertex expects that it will maintain a strong leadership position in the CF market at least through the late 2030s.

What about growth? Vertex has just begun to market its newest CF drug, Trikafta/Kaftrio, in Europe. The drug became an almost instant blockbuster in the U.S. last year and is almost certain to do so across the Atlantic as well. Meanwhile, Vertex has also gained additional approvals for some of its other CF drugs that should boost sales.

The biotech's pipeline also includes several potential huge winners. Despite a disappointing setback for one of its programs targeting genetic disease alpha-1 antitrypsin deficiency (AATD), Vertex will report phase 2 study results from another AATD candidate this year. The company's partnership with gene editing pioneer CRISPR Therapeutics could lead to a cure for rare blood disorders beta-thalassemia and sickle cell disease.

Finally, Vertex has a massive cash stockpile that it can and likely will use to expand its pipeline. The company used nearly $1 billion in 2019 to buy Semma Therapeutics. The deal gave Vertex a promising gene therapy targeting type 1 diabetes that should advance to clinical testing this year.

2. Exelixis

I view Exelixis (NASDAQ:EXEL) as something of a diamond in the rough. The stock only rose 14% last year, well below the performance of the SPDR S&P Biotech ETF. However, 2021 could be a much better year for Exelixis.

The company's crown jewel is Cabometyx, which has already been approved in the U.S. as a first-line treatment for kidney cancer and a second-line treatment for liver cancer. Cabometyx appears to be on track to generate sales of well over $650 million this year. However, the drug isn't close to achieving its full potential yet.

Exelixis has a big opportunity with Cabometyx as part of combination therapies. A combo of the drug with Bristol Myers Squibb's Opdivo could win U.S. regulatory approval later this year. Cabometyx also has room to grow in international markets. That seems likely to happen, especially with a recent Japanese approval as a second-line treatment for liver cancer.

Thanks to the commercial success of Cabometyx, Exelixis' cash position has improved significantly. And it's putting that cash to use in beefing up its pipeline. In December, the company licensed Iconic Therapeutics' lead antibody-drug conjugate program XB002 as well as experimental cancer drug XL102 from Aurigene, a subsidary of Dr. Reddy's.

3. Novavax

Interested in a really high-risk, high-reward biotech stock? Check out Novavax (NASDAQ:NVAX). It was one of the biggest winners in 2020 with shares skyrocketing 2,700%. I think Novavax can move even higher this year.

Novavax's rise last year was fueled mainly by rapid progress for its COVID-19 vaccine candidate NVX-CoV2373. The company's early stage results for the experimental vaccine were so encouraging that some analysts called it potentially best-in-class. Along the way, Novavax picked up more than $2 billion in funding for its coronavirus program and supply deals with several countries.

The biotech expects to announce interim results from a late-stage study of NVX-CoV2373 conducted in the U.K. early this year. Novavax initiated a late-stage study of the vaccine candidate in the U.S. and Mexico at the end of December. It's possible that the company could be in a position to file for U.S. emergency use authorization in the second quarter of 2021.

Bernstein analyst Ronny Gal projects that Novavax could make $3.8 billion from NVX-CoV2373 this year. The company also has another potential blockbuster candidate that's headed for a regulatory approval filing with experimental flu vaccine NanoFlu. With its market cap still hovering around $8 billion, this high-risk biotech could deliver some big rewards if its clinical studies go well.

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