Following the outbreak of Covid-19, medical institutions, pharmaceutical companies, and even governments are realising the importance and applications of genomics – both from a diagnostic and treatment perspective.

Consequently, analyst forecasts of the already multi-billion-dollar genomics market predict immense double-digit annual growth over the next decade. 

Needless to say, that could be a very lucrative opportunity. So, let’s dive into the details about investing in genetics shares.

What are genetics stocks?

Genetics stocks occupy a small section of the biotech industry. As the name suggests, these businesses focus on developing treatments for genetic diseases by repairing or replacing the faulty genes causing the problem.

The genomics industry isn’t particularly new and has been around for decades. But due to the high costs, commercialisation has been challenging and still remains that way today. However, thanks to recent technological advancements, development costs are falling drastically while simultaneously boosting accuracy. 

Therefore, it’s no surprise that research into gene therapy has accelerated, with potentially game-changing treatments entering clinical trials both in the UK and abroad.

Genetics shares can be categorised into three segments:

• Sequencing & analysis – Companies analysing genetic data to detect defects in patients
• Testing & diagnostics – Firms using sequencing data to diagnose genetic diseases
• Gene editing – Biotech groups developing gene therapies that eliminate defects in the genome sequence

While there is some overlap in each category, firms within their respective segments often have different target markets and don’t necessarily compete with each other. However, the level of competition within each category is rising as more businesses seek to capitalise on the massive growth opportunity.

Unsurprisingly, this level of growth comes with a high volume of risk. The medical industry is highly regulated, with each test, device, and drug required to meet rigorous standards. 

Drug development is particularly notorious for its difficulty. In fact, a study by the Biotechnology Innovation Organisation showed that only 9.6% of treatments that make it to phase one clinical trials actually reach the market.

So, it’s hardly surprising that most pure-play genetics stocks are exceptionally volatile. And in some cases, the failure of a clinical trial can be a death sentence for these businesses. But all it takes is one successful treatment to potentially unlock multi-billion-dollar annual revenues.

With that in mind, let’s explore the top five UK genetics shares in order of market capitalisation.

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Top genetics shares in the UK

Oxford Nanopore Technologies

Oxford Nanopore was spun out of the University of Oxford in 2005. Since then, the business has become one of the UK’s largest genetics stocks, developing a proprietary DNA and RNA sequencing technology. It’s the first one of its kind to provide real-time data analysis and rapid testing.

This technology has been embedded into a variety of devices which the group primarily sells to scientific researchers involved with clinical trials. However, management has also been broadening its horizon, targeting several applied markets. 

The list includes consumer healthcare with its Covid-19 rapid testing solution, agriculture by identifying superior plant genomes, and even the environment by analysing the microbial composition of glaciers.

Key metrics:

• Market cap: £2.24bn
• Average daily volume: 1.86m
• HQ: Oxford, UK
• Cash/debt: £618m/£25m

Genus

Genus is a world-leading genetics sequencing business that focuses on the animal agriculture industry. The company owns directly (and indirectly through partnerships) various herds of pigs and cattle. Using its sequencing technology, the group tests and identifies key desirable traits among the herd, such as feed efficiency, disease immunity, protein and fat content, and fertility.

Management then generates revenue by selecting the animals with the strongest genetic profile for breading with farmers’ herds. The end result is healthier offspring, lowering costs for farmers while simultaneously increasing the quality of the end product for consumers.

Key metrics:

• Market cap: £1.58bn
• Average daily volume: 110.44k
• HQ: Basingstoke, UK
• Cash/debt: £46m/£152m

Ergomed

Ergomed is a global contract research organisation (CRO) that works directly in partnership with drug developers. Running clinical trials is challenging, and pharmaceutical giants often turn to CROs like Ergomed for their expertise.

This genetics stock doesn’t own any proprietary technology within the genetic editing space. However, it does have a long track record of providing support services for cell and gene therapy clinical trials in oncology (cancer) research.

The group charges its customers on an ongoing basis. With more genetics shares entering the arena, demand for its services has been steadily climbing over the years.

Key metrics:

• Market cap: £540.62m
• Average daily volume: 85.93k 
• HQ: Guildford, UK
• Cash/debt: £31m/£2.68m

Oxford Biomedica

Oxford Biomedica is a rising gene and cell therapy business specialising in viral vectors. In oversimplified terms, the company re-engineers existing viruses to deliver improved genetic material into patients’ cells.

Management is using this technology to develop its own treatments. However, management also outsources its capabilities to other drug developers via its LentiVector platform. 

This drastically reduces the cost of developing gene and cell therapies. So, it’s not surprising that pharmaceutical titans like Bristol Myers Squibb, AstraZeneca, and Novartis are all active customers. These customers pay ongoing milestone fees throughout development, as well as a royalty on sales for any drug that makes it to market. However, it’s worth noting that most of the current drug pipeline using LentiVector remains relatively early stage.

Key metrics:

• Market cap: £504.34m
• Average daily volume: 302.69k
• HQ: Oxford, UK
• Cash/debt: £109m/£9.34m

ReNeuron Group

ReNeuron is a specialist in stem cell therapy. Using its proprietary Exosome Technology platform, the company can deliver payloads of critical proteins such as siRNA, mRNA, and genetic materials to patients.

The technology has proven to be quite promising. However, unlike its peer genetic stocks, this business remains firmly in the early-stage portion of its lifecycle. Today, ReNeuron has two flagship assets, both in phase two clinical trials. One is for treating retinitis pigmentosa, a progressive disease that leads to blindness. And the other is for repairing damage after a stroke.

Key metrics:

• Market cap: £21.68m
• Average daily volume: 44.12k
• HQ: Bridgend, UK
• Cash/debt: £22m/£0.72m

Investing in the US genetics industry

American genetics stocks have to navigate an equally complex regulatory environment. In the UK, all medical treatments and tests need to be approved by the Medicines & Healthcare Regulatory Agency (MHRA). In the US, approval is required by the Food & Drug Administration (FDA).

The US stock market has plenty of genetics shares listed. So, let’s explore some of the leading businesses in this space in order of market capitalisation.

1. Illumina (NASDAQ:ILMN)
2. CRISPR Therapeutics (NASDAQ:CRSP)
3. Fulgent Genetics (NASDAQ:FLGT)
4. Pacific Biosciences of California (NASDAQ:PACB)
5. Editas Medicine (NASDAQ:EDIT)

Are genetics stocks right for you?

The world of genetics stocks is a highly volatile place. Just looking at these five UK genetics shares demonstrates that perfectly. 

Over the last five years, some have achieved tremendous growth. For example, Ergomed and Oxford Biomedica are up 434% and 110%, respectively. Sadly the same can’t be said for Oxford Nanopore and ReNeuron Group, which are down 55% and 82% across the same period. And shrinking the range down to the last six months reveals double-digit declines for all five companies. What’s more, a similar story exists when looking across the pond.

Needless to say, individuals thinking about investing in genetics stocks need to have a high risk tolerance. While genetic research may have been around for decades, the same can’t be said for most of the stocks listed today. And odds are most will fail in their quest to capture the multi-billion-dollar market opportunity.

That’s why we recommend taking a diversified approach. By owning a basket of companies in this area, the odds of finding the future industry leader climb higher.

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Disclosure

Zaven Boyrazian owns shares in Oxford Biomedica. Zaven Boyrazian’s mother is an employee of Bristol Myers Squibb involved with clinical trials.

The plan for big returns from investing

The esteemed growth investor Jim Slater said elephants don’t gallop. In other words, shares in large-cap companies can’t rise as quickly as share in smaller-cap companies. Other successful investors have echoed that sentiment. Though there’s nothing wrong with big companies, and I own many myself, smaller companies have more potential to grow. 

It’s because smaller growth shares tend to be more agile and innovative, as well as more likely to be acquired, that they are potentially rewarding investments.

The flip side, of course, is that sometimes their share prices are more volatile. They can lack the balance sheet strength and diversification of some of the bigger companies.

Also, growth shares tend to reinvest in their business so many don’t pay out dividends, although of course, some do. Generally, I’m happy though with reinvestment into the business if it is done well and helps the company grow.  

Smaller UK growth shares make up part of my portfolio, as I don’t want to just invest in FTSE 100 dividend paying stocks.

Examples of UK growth shares

Ergomed is one example of a UK growth share that I potentially would invest in. Between 2016 and 2020, revenues went from around £39m to over £86m. At the same time, operating profit went from being practically negative to up to £13.5m. To me, this is impressive. This rate of growth, along with the shares already having risen 500% in just a few years, are two of the factors that make me think the share price can rise strongly. 

Performance at the pharmaceutical industry services company continues to be strong. 2020 was a very good year and I expect the future is very bright for the group. The risks with this share are that it overpays for acquisitions (often this hurts shareholder returns) and that its investment in drug development doesn’t work out as planned.

I also like the look of retail logistics company Clipper Logistics (LSE: CLG). It has benefitted from the move to e-commerce – a trend that is set to continue even once lockdown lifts.

Customers want to shop online more and more because it is convenient. There’s a structural change in retail that benefits Clipper Logistics and should therefore help its share price continue to rise.

The management at Clipper Logistics has been able to upgrade their forecasts, which is something I always want to see when it comes to a growth share.

I think past performance provides reasons for optimism about the future. It’s why a 500% share price rise could be on the cards. Between 2016 and 2020, revenues nearly doubled, going from £290m to more than £500m. Operating profit more than doubled at the logistics company, from £14.5m to £31.5m. Any improvement in margins at the e-commerce company could be transformational and see the shares reate upwards. 

The risk is that there’s a slowdown in e-commerce following the pandemic which could hit sales growth. Or that the shares are seen as too expensive on a price-to-earnings of 38, which is quite high for any business, let alone a logistics business. 

Two unique biotech companies have caught my attention, both of which seem to have incredible potential for growth. Would I buy them now?

A biotech stock breeding success

Fishermen have been struggling to keep up with the rapidly rising demand for fish through traditional fishing methods. To keep up, many businesses are turning towards aquaculture. That’s an industry where the fish are bred, raised and eventually harvested for consumption, rather than catching them wild.

Between 1990 and 2018, aquaculture’s total fish production increased over 520%. And this created a very favourable environment for Benchmark Holdings (LSE:BMK).

The biotech stock has three operations. Its genetics department uses genomics to breed fish and improve their resistances towards most diseases. The second manufactures specialised food that improves health and reduces mortality. The final segment focuses on developing specialised medicine to treat infected salmon.

For example, sea lice are a plague that costs salmon breeders nearly $1bn worldwide each year. However, Benchmark successfully created an award-winning solution that eliminates sea lice without harming the fish.

Combined, the company enables farmers to maximise their efficiency and yield. The stock has a strong balance sheet and clearly operates in a market growing at exceptional rates.

However, there are some considerable risks. The business is still young and has yet to generate any profits. What’s more, its portfolio of products, while impressive, remains quite limited. As such, it looks overly dependent on certain key products in my eyes.

Providing a path through clinical trials

The pharmaceutical industry is one of the most highly regulated sectors in the market today. And while the regulations protect patients’ health, they also introduce complications for pharmaceutical companies.

Fortunately, Ergomed (LSE:ERGO) has a solution. The biotech stock is a global provider of specialised clinical trial services for the drug development industry.

Its pharmacovigilance (PV) segment performs drug safety monitoring throughout all stages of development, as well as after a product enters the market. The firm also provides research management services through its clinical research outsourcing (CRO) department. These services include planning, monitoring, and reporting of clinical trial data.

The PV and CRO industries are expected to grow by 11.6%, and 7.5%, respectively, over the next five years. Needless to say, I think this presents a considerable investment opportunity.

But there is one significant problem I’ve spotted for this biotech stock — Brexit. As the UK is no longer part of the EU, the regulatory environment for drug development has already begun to change. And this continues to create complications and delays throughout the drug development process.

Consequently, any delays in clinical trials will impact Ergomed’s revenue, at least temporarily. However, the degree of impact should be limited as the firm generates most of its revenue outside the UK. 

The bottom line

Both of these biotech stocks have performed exceptionally well over the last 12 months. Combined, their share prices have increased by over 100%!

And while I see enormous potential in both businesses, there remain several unknown factors that make me slightly cautious. Therefore, I’m not adding either stock to my portfolio just yet. But I’m definitely going to keep an eye on them.

But I’m also keen on some small-cap shares in the wider pharmaceutical sector. For example, today’s audited full-year results report from Ergomed (LSE: ERGO) is full of positives. And the share price has risen a bit today too.

Doing its bit for the coronavirus pandemic

The small-cap company provides specialist services to the pharmaceutical industry. And on 18 March, it announced its involvement in a clinical study aimed at finding a treatment for patients with Covid-19, who have developed serious respiratory complications. The study is sponsored by the Papa Giovanni XXIII Hospital in Bergamo, Italy, and supported by EUSA Pharma (EUSA).

That’s a small part of the company’s activities, which span “all phases” of clinical development, post-approval pharmacovigilance, and medical information. And today’s figures reveal to us some patterns of fast growth within the business. In 2019, revenue grew by just over 26% compared to the prior year, and adjusted EBITDA shot up by a little over 440% to £12.5m. Looking ahead, the order book of future contracted revenue rose by a just under 14% to a smidgeon above £124m.

Executive chairman Dr Miroslav Reljanović described in the report how 2019 has been a “transformational” year for Ergomed.  He reckons the business performed “strongly” and the acquisition of Ashfield Pharmacovigilance after the end of the period was a “major strategic step” for the company in the US.

Growth on the agenda and strong finances

Growth is on the agenda, but the firm is monitoring “closely” the escalation of the coronavirus outbreak. Reljanović thinks Covid-19 poses an “unprecedented” global healthcare challenge. And he hopes Ergomed can use its “expertise and proven capabilities” to advance drug development and improve outcomes for coronavirus patients.

Meanwhile, the balance sheet looks strong with no borrowings. Cash and equivalents rose by almost £175% in the period to just over £14m, which compares with lease liabilities of just under £5.5m.

I reckon cash inflow has pushed profits higher, which combines with the strength of the firm’s finances to provide a solid base for further expansion. But, just to make sure, the company agreed a new £30m credit facility with its bankers to fund its growth strategy and to help with any challenges that may arise because of the coronavirus.

My guess is we can expect further progress abroad in the years ahead. In 2019, around 42% of revenue came from mainland Europe, the Middle East and Africa, 37% from North America, 19% from the UK, 2% from Asia, and a tiny comparative amount from Australia.

Meanwhile, with the share price close to 340p, the forward-looking earnings multiple for 2020 sits near 18. That strikes me as fair for a company with decent growth prospects.

Cogito ERGO sum

Specialised pharmaceutical services and drug development company Ergomed (LSE: ERGO) is up a healthy 4% after reporting preliminary full-year results for calendar year 2017 this morning. Its numbers showed impressive 36% growth in net service revenue, driving total revenue growth of 21%.

New business wins rose 29% to £54m, with its contracted backlog of £88m up more than 25% from £70m one year earlier. The £85m market cap minnow also reported positive PeproStat Phase II results. CEO Stephen Stamp hailed “another very strong year” for its pharmacovigilance business as it continues to outperform a fast-growing market. The group aims to become a leading global provider in this field by 2020. 

Ergo to grow

Ergomed is now looking to grow both organically and through strategic acquisitions, having refined its corporate strategy to focus on services businesses. In February, an institutional placing raised £3.9m for further acquisitions and working capital.

My Foolish colleague Peter Stephens alighted on the stock last month, praising its rapid growth potential and lowly forecast PEG ratio of just 0.3 (it now stands at an even lower 0.2). City analysts are optimistic about its prospects for this year, predicting whopping earnings per share (EPS) growth of 172% in 2018, then 31% in 2019. That will shrink its current heady valuation of 44 times earnings to a more amenable 15.8.

This could be the start of something exciting after two consecutive years when EPS fell 28% and 38%. This one could fly, but brace yourself, as small growth pharma firms like this one are inevitably risky.

We were giants

Pharmaceuticals giant AstraZeneca (LSE: AZN) is at the other end of the scale with a market cap of a dizzying £64bn. But its recent share price history has also been choppy as investors grit their teeth and wait to see if chief executive Pascal Soriot’s long-term pipeline refreshment strategy will send profits gushing.

His turnaround strategy still has some way to run and 2018 could prove bumpy, with EPS forecast to drop 18% this calendar year. However, it is looking to accelerate new product launches, and this should help fuel a predicted 13% EPS growth in 2019. Operating margins are also expected to improve, from 18.2% to 22.9%.

Woodford sells

Not everyone is impressed by Astra’s prospects, long-term backer Neil Woodford has recently been selling down his stake. Cynics might suggest this makes now a good time to buy, since everything Woodford touches turns to dust at the moment, but that would be cruel.

I was disappointed to see it trading at a valuation of 20.3 times earnings, and this could also be a key reason for Woodford’s sale. AstraZeneca’s forecast yield of 4.1% is of course tempting, and it remains a great long-term hold for income and capital growth, if you have the patience to stay the course. However, today’s valuation makes it look expensive given current uncertainties, and you may find a better buying opportunity further along the pipe.

As such, GlaxoSmithKline (LSE: GSK) could prove to be a worthwhile purchase for retirement. However, it’s not the only pharma stock that could be worth buying right now.

Mixed update

Reporting on Monday was specialised pharmaceutical services and drug development company Ergomed (LSE: ERGO). Its share price fell by around 7% following the release of a trading update. The main reason for this seems to have been the fact that its EBITDA (earnings before interest, tax, depreciation and amortisation) is set to miss expectations. It is due to be £0.9m lower than guidance of £6m due to foreign exchange fluctuations and higher-than-expected R&D expenses.

Despite this, the stock appears to be performing well overall. Its service business saw revenue growth of 35% in 2017, while an order backlog of £88m is up on the previous year’s figure of £70m. This suggests that the company continues to have growth potential over the medium term.

In fact, Ergomed is due to deliver a rise in its bottom line of 77% this year, followed by further growth of 54% next year. Despite such rapid growth potential, it trades on a price-to-earnings growth (PEG) ratio of just 0.3. This suggests that it could offer growth at a reasonable price – especially with the long-term growth potential that seems to be on offer within the healthcare industry.

Margin of safety

Clearly, GlaxoSmithKline does not offer the same level of earnings growth potential as Ergomed. However, it does appear to have a solid risk/reward ratio due to the diversity of its pipeline. This could mean that it offers resilient growth potential in the long run, and that its share price performance is less volatile than for many of its sector peers.

In addition, GlaxoSmithKline has strong income prospects. It currently has a dividend yield which is over 6% and that is expected to be covered 1.4 times by profit next year. This suggests that there could be scope for increasing dividends over the long run. This could help investors to not only overcome heightened levels of inflation, but may also mean that it can provide a high level of income into retirement for many investors.

With GlaxoSmithKline trading on a price-to-earnings (P/E) ratio of around 12, it seems to offer excellent value for money. Its low rating relative to the wider sector suggests that it could have a wide margin of safety, while providing the potential for significant share price growth in future years. As such, now could be the perfect time to buy it.

Ergomed does engage in such research and has an enticing-looking pipeline — but on top of that, it also provides specialised services across the pharmaceutical industry. That turns it into the kind of picks-and-shovels company that I like — whoever makes the big discoveries, Ergomed’s services division should benefit.

Full-year results should be with us at the end of March, and Thursday’s trading update suggests they’ll be very good indeed.

Seriously impressive growth

Total revenue for the year is expected at around £47m, up 21% from 2016’s £39.2m. And crucially, that all-important services revenue should leap by 35% to £39m, from £29.2m. The growth is actually accelerating too, with new service contracts worth £54m won during the year — and that’s 29% up on the previous year.

Add to that an £88m order backlog of contracted future work at the end of the year (up from £70m), and I reckon we’re looking at a company with a glowing future.

And the big beauty is, we don’t have to pay an inflated growth price for the shares. Admittedly we’re looking at a P/E based on 2017 expectations of 31, but very strong EPS growth forecasts would bring that crashing down. The 75% rise predicted for 2018 would drop it to 17.5, with 2019’s 54% hammering it as low as 11.5.

Growth forecasts like that provide super-low PEG ratios of 0.2 for each of the next two years – surely an attractive growth opportunity.

Oil recovery

I took a calculated risk buying shares in Premier Oil (LSE: PMO) in late 2015, banking on an oil price recovery taking the pressure off the firm’s heavy debt burden — and then they slumped further. It’s taken a while, but I’m just about back to break-even, and I see the future for the company as looking more attractive.

Just before Christmas, Premier announced the completion of the sale of its Wytch Farm field to Perenco UK, which raised a welcome $200m to go towards paying down debt.

Then, in late December, we heard news of first oil from the firm’s Catcher field, with the project coming in almost 30% under budget. With an initial expected production rate of around 10,000 barrels per day, chief executive Tony Durrant described the event as “a significant milestone for Premier.“

First cargo sold

And Wednesday’s Catcher update announced the lifting of its first export cargo of approximately 500,000 barrels ahead of schedule — and it’s been sold. There’s another cargo due in late February, and that has also been sold.

Performance so far is said to have been “excellent with high operational uptime,” and gas commissioning is going well.

The other boon is the recovering oil price, with Brent Crude having now broken through the $70 level — it was as low as $55 as recently as November. I’d set a finger-in-the-air estimate of around $75 for the price at which I’d start feeling safer about my Premier investment, and we’re getting close.

But there’s still a lot of risk attached to it, and you might (or might not) be surprised to learn that it’s one of the most shorted stocks in the UK. Bear that in mind if you buy.

The firm is making good strategic and operational progress that could propel the stock higher over time. Today’s interim results revealed revenue just over 30% higher than a year ago and a 42% lift in the gross profit figure.

Fast-growing services division.

The firm provides specialised services to the pharmaceutical industry and develops new drugs. The services division is growing fast and posted a 53% revenue increase during the first half of the year drawn from clinical research operations in over 40 countries. Meanwhile, the co-development division seeks partnerships with biotech and pharmaceutical companies where Ergomed delivers drug development services in exchange for carried interests in any revenues that the new drugs generate, which could come from sales and milestone payments.

The company signed service contracts worth £23m during the period and has a backlog of signed contracts pushing above £70m, which is almost 17% higher than a year ago. Meanwhile, several drugs in development could go on to generate decent income for the firm. Although for the time being more than 80% of the firm’s revenue appears to come from services rather than from carried interests.

Low debt

I like the firm’s low level of borrowings. The balance sheet in today’s report shows around £7k of debt being off-set by more than £2.4m in cash. But there was a cash outflow of a little over £1.3m in the period up from an outflow of £0.93m last year. Operating profit declined almost 9% due to a rise in administration, research and development costs.

I’m optimistic that the firm will soon find stronger feet when it comes to cash flow and profits and Chief Executive Dr Dan Weng is “confident that Ergomed is well positioned for further growth, both organic and through acquisition.” I reckon, with the forward price-to-earnings (P/E) ratio running a little over 13 for 2018, the firm is one to keep a close eye on.

Bioventix (LSE: BVXP) also updated the market with a trading update at the beginning of September. The firm specialises in the development and commercial supply of high-affinity monoclonal antibodies and earns its revenue by licensing the use of its creations to other firms that use them for clinical diagnostic work.

Low costs

Once again, the news from the company is good with revenues for the financial year to 30 June a little higher than £7m, which is more than 27% higher than the year before. The firm explains that because costs are only rising a little as revenues rise a lot, the directors expect revenues and profits for 2017 to be ahead of what the market was previously expecting — again!

Bioventix has been a dream investment for many over the past three years with the share price rising more than 320% due to ongoing operational progress and a valuation re-rating. Today’s 2,487p share price throws up a forward P/E rating of almost 29 for the year to June 2018, which looks full, but I reckon this stock has more to give.