3 Best of Breed Biotech Stocks

By Markets Fool.com

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If you've ever watched a dog show, you know what prize every pup (or least every pup's owner) desires. From Chihuahuas to Great Danes, winning "best of breed" is the ultimate honor.

I think there are some best of breed in the world of biotech stocks, too. There are many ways to categorize these stocks into "breeds," but one simple way is based on market cap. Here are three biotech stocks that I think could easily win best of each breed using this approach.

1.Gilead Sciences
There are only a dozen large-cap biotech stocks with market caps of $10 billion or more. And the biggest also is arguably the best -- Gilead Sciences.

Gilead has long been dominant in the HIV drug market. More recently, the biotech has emerged as the 800-pound gorilla in the hepatitis C drug market. Gilead's Harvoni and Sovaldi combined for over $12 billion in sales in 2014.

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What makes Gilead best of breed? For one thing, its return on equity, a favorite metric for many investors, stands above 90%. That's at least two times bigger than every other large cap biotech with the notable exception of Medivation, which barely qualifies as a large-cap stock with the company valued at $10.1 billion.

Gilead's earnings have been growing like crazy, thanks primarily to its hepatitis C drugs. Last quarter, Gilead saw year-over-year earnings jump by nearly 95%. Combine all of that with the company's attractive valuation (Gilead has a forward earnings multiple less than 10) and you've got a best of breed large-cap biotech stock.

2.Celldex Therapeutics
With 30 or so biotech stocks carrying valuations between $2 billion and $10 billion, finding the best of breed mid-cap stock is more challenging. That's particularly true considering that many of these stocks don't have an approved product on the market yet. However, Celldex appears to be a great candidate for mid-cap best of breed biotech stock honors.

Celldex gets the nod due to its promising cancer vaccine Rintega. The drug gained FDA Breakthrough Therapy Designation in February for treatingadult patients with EGFRvIII-positive glioblastoma. A phase 3 study of Rintega is currently under way, with interim results expected soon. If all goes well, Celldex could have a blockbuster drug within the next few years.

That's not the only potential winner in Celldex's pipeline, though. Glembatumumab vedotin, or glemba, is in phase 2 testing for treating breast cancer. Enrollment is in process for another phase 2 trial focusing on metastatic melanoma. Celldex also plans to study the possibility of glemba in treating other diseases, including lung cancer.

3.Ligand Pharmaceuticals
The most difficult "breed" of biotech to pick a winner is small-cap stocks with valuations between $300 million and $2 billion. There are plenty of solid contenders, but my vote for best of breed goes to Ligand Pharmaceuticals.

Unlike most small biotechs, Ligand already claims multiple approved drugs -- with two standing out as notable winners. Promacta is marketed by Ligand's partnerNovartisas a treatment for three indications, including severe aplastic anemia. Multiple myeoloma drug Kyprolis is marketed by Amgen.

What I really like about Ligand, though, is its business model of licensing itsCaptisol technology. This technology helps drugmakers develop new drugs more effectivelyby improving solubility and stability of active pharmaceutical ingredients. Many of the world's leading pharmaceutical companies use Captisol. Ligand claims over 120 fully funded partnered programs.

Booms and barks
You wouldn't have gone wrong by buying any of these potential best of breed biotech stocks in the past. Over the last 12 months, both Gilead and Ligand are up around 35%. Celldex more than doubled during that period.

All three are also Wall Street favorites. Analysts expect Gilead's shares to increase over 10% in the next year. The consensus one-year price target for Celldex reflects a 36% jump from current levels. And Wall Street projects that Ligand's stock price will move more than 15% higher over the next 12 months.

They could be wrong, of course. I suspect, though, that they're generally barking up the right trees.

The article 3 Best of Breed Biotech Stocks originally appeared on Fool.com.

Keith Speights owns shares of Gilead Sciences. The Motley Fool recommends Celldex Therapeutics and Gilead Sciences. The Motley Fool owns shares of Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.