Biopharmaceutical stocks have been on a tear so far this year. Many key companies on the medicinal frontier have rewarded shareholders handsomely for their faith and favor — though a few of those hot stocks still have the legs to run further.
But caveat emptor — make sure to balance the potential reward with the significant risk.
Industry research firm IMARC forecasts that by 2017, the global biopharmaceutical market will reach $166 billion in sales — a forecast that anticipates double-digit annual growth over the next four years.
Boutique drugs that target rare, but dangerous, conditions can become billion-dollar blockbusters for the companies that clear all the complex hurdles required to bring such treatments to market. Additionally, traditional Big Pharma companies like Eli Lilly (NYSE:LLY), Merck (NYSE:MRK) and Bristol-Myers Squibb (NYSE:BMY) are moving heavily into biopharmaceutical M&A as a means of giving their own more mature drug pipelines a boost.
From an investment perspective, though, it’s important to remember that biotech is a bleeding-edge sector — and the risk in most cases equals the potential reward. The big stat to keep in mind here is that three out of every 10 drugs that enter the clinical trial stage will ever win approval and hit the market. So if you’re nearing retirement and looking to generate income, sinking your nest egg into a hot, thinly traded micro-cap biopharma stock dependent on one trial-stage drug is a fairly dangerous play.
While I would suggest that most conservative traders simply pile into an exchange-traded fund like the iShares Nasdaq Biotechnology Index (NASDAQ:IBB) ETF — which boasts nearly $2.6 billion in assets under management and has gained 28% since the beginning of the year — investors still might do well to focus on a few individual biopharma names.
With that in mind, here are three hot biopharma stocks — one large cap, one midcap and one small cap — for investors of varying risk appetites.
Large Cap: Gilead Sciences ($86.8B Market Cap)
Gilead Sciences (GILD) stock recently set a new all-time high after reporting that in a recent Phase 2 study, its oral drug idelalisib successfully drove the life-threatening chronic lymphocytic leukemia (CLL) into remission. The regimen produced a 97% response rate, with 93% of trial patients surviving progression-free at the end of two years. CLL, which produces too many mature white cells, is the second most common form of leukemia in the U.S.
Last Tuesday, GILD announced its oral hepatitis C drug sofosbuvir has been validated by the European Medicines Agency and is now under formal review. Last month, the company submitted an application for the drug to the FDA. Gilead also has a strong HIV drug franchise — including a four-drug HIV therapy Stribild.
While GILD shares have more than doubled in the past year, it still sports only slightly frothy valuations, including a forward price-to-earnings ratio of 19.5 and a price/earnings-to-growth ratio of 1.1. Considering GILD’s financial position and solid pipeline, it should continue to defy gravity as long as its trials stay on track.
Midcap: Alkermes ($4.3B Market Cap)
Alkermes (ALKS) boasts a portfolio of some 20 commercial products in several major disease areas, including multiple sclerosis (MS), schizophrenia, narcotic and alcohol dependence and type 2 diabetes.
Major drugs in the company’s pipeline include 5461, a treatment for the symptoms of major depression that works by modulating opioid receptors in the brain, and 3831, an investigational medicine for the treatment of schizophrenia that also targets opioid receptors and aims to reduce traditional side effects including weight gain. The company announced last Wednesday that it will present clinical data on both drugs at this week’s 53rd Annual New Clinical Drug Evaluation Unit meeting in Hollywood, Fla.
ALKS is flying around decade-long highs and also has more than doubled in the past year; it looks significantly overvalued compared to GILD on a forward P/E basis, trading at 28 times next year’s earnings, though its PEG is a very low 0.37. The balance sheet isn’t bad for a midcap biopharma — total cash is $209 million vs. debt of $370 million, and quarterly revenue growth is about 8% year-over-year.
Research suggests that cracking the code on various opioid receptors in the body could make it easier to treat other conditions such as obesity, but naturally this novel approach makes ALKS a riskier play. I think ALKS will gain more altitude this year, but I’d probably wait until after this week’s clinical trial data presentation to initiate a new position.
Small Cap: Novavax (Market Cap: $305.4M)
Novavax (NVAX) might be small, but the company’s vaccine pipeline packs a powerful punch.
Instead of taking the traditional approach to vaccines — using killed or weakened viruses — the company uses recombinant DNA molecules to develop tailored solutions to new strains. It does this by taking the genetic code of dangerous viruses or pathogens and engineering “customized” vaccines to attack them. Using this approach, the company says it can bring targeted vaccines to market in a matter of weeks to head off potential new pandemics.
Novavax currently is developing vaccines to address the H5N1 strain of influenza and respiratory syncytial virus (RSV). Additionally, it has contracts with the U.S. Office of Biomedical Advanced Research and Development Authority and the Department of Homeland Security for influenza and foot-and-mouth disease vaccines respectively. Speculation that NVAX might be tapped to develop a vaccine for the nasty new H7N9 influenza strain also helped the stock last week.
NVAX is trading just north of $2 a share right now and has gained 79% during the past year — in large part due to progress in a string of clinical trials for RSV, seasonal influenza and pandemic influenza.
Make no mistake, NVAX is a bleeding-edge play, but if it hits on even one of these big pandemic virus vaccines, it could shoot through the roof. If you’ve got a little mad money stashed away and want to feel like a high roller in this fast and furious sector, Novavax could be a fun way to go.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.