Biopharmaceutical stocks may have taken a quick chill after the Supreme Court’s ruling against gene patents last month, but promising clinical trial news on several fronts this week has once again heating up the sector.
A quick recap: Back on June 13, the High Court ruled that isolated, naturally occurring human genes cannot be patented, although genes engineered in the lab — so-called cDNA molecules — can be. The ruling was a setback to Myriad Genetics (MYGN), which had gained patents on the BRCA 1 and BRCA 2 genes; women with mutations of these genes are five times more likely to be diagnosed with breast cancer.
MYGN shares fell nearly 25% over the next week on the news, although the company still has scores of patents unaffected by the High Court’s decision. The ruling also triggered a mild retreat for many other names in the sector.
But as is the case in most bleeding-edge sectors, biotech has a short attention span. The looming bidding war for cancer-focused Onyx Pharmaceuticals (ONXX) — ignited after Onyx spurned an unsolicited $10 billion takeover offer from Amgen (AMGN) earlier this month — supplanted the Supreme Court ruling in investors’ minds. Plus, this week’s spate of positive clinical trial news has further buoyed the sector.
For investors, such volatility highlights the need to balance these promising biotech plays with your risk tolerance and investment horizon. See, in volatile, emerging markets like biotech, the risk often equals — or surpasses — the potential reward. It bears repeating that only three out of every ten drugs that enter the clinical trial stage will ever win FDA approval and go to market.
With that in mind, investors looking to gain exposure to the market by buying individual stocks — rather than through an exchange traded fund like the iShares Nasdaq Biotechnology Index (IBB) ETF — should vet stocks carefully. And although size does not always equal safety, a large-cap biotech company with a deep drug pipeline generally will be a less risky play than a thinly traded microcap with a high-stakes potential blockbuster therapy.
With at in mind, here are three hot biopharma stocks for different risk tolerances and time horizons:
Large Cap: Celgene
The $60 billion biopharma stock Celgene (CELG) soared nearly 7% to a record high on Thursday on news that late-stage trials of its cornerstone blood cancer drug Revlimid have boosted survival rates in patients newly diagnosed with multiple myeloma.
Phase III studies of the oral drug, which were tested on about 1,600 patients, found Revlimid stopped progression of the disease, boosting the likelihood that regulators in the U.S. and Europe will approve broader use of the drug later this year. Of course, the drug — which generated $1 billion in sales for Celgene last quarter — has been approved for use only in cases where other treatments have failed.
Luckily, Celgene has a deep drug pipeline that also includes treatments for solid-tumor cancers, multiple sclerosis and inflammatory diseases such as psoriasis.
Plus, CELG is a fairly valued buy, sporting a price/earnings-to-growth (PEG) ratio of about 1 and a forward P/E of 18, which is about right for a large-cap biotech. And CELG’s beta of 0.8 — an indication that the stock is less volatile than the broader market — should settle jittery investors.
Midcap: Questcor Pharmaceuticals
A market cap under $3 billion technically is a small cap, but we can loosen the rules a tad for companies like Questcor (QCOR) considering the $2.8 billion defies convention by being one of the few players in this sector to pay a dividend. In fact, a recent dividend hike by management brought the current yield to 2.1%.
The centerpiece of QCOR’s franchise is Acthar, which treats muscle spasms in MS patients. The company just received approval for the drug to treat spasms in kidney and other conditions and announced plans for commercial expansion of Acthar to treat an inflammatory disease known as symptomatic sarcoidosis. QCOR shares rose more than 2% Thursday on the news.
Despite Qualcomm’s 80% year-to-date run, it sports a PEG ratio of under 0.5 and a forward P/E of about 10, making it look like a bargain now. Plus, with over 30% of the stock sold short, more upside could easily result in a squeeze.
The biggest caution with QCOR is its heavy focus on a single drug — Acthar — which could make it vulnerable to competitors. It doesn’t hurt, however, that QCOR acquired rights to develop the autoimmune treatment Synacthen from Novartis (NVS).
Small Cap: OncoSec Medical
(PINK:) $33.3 Million Market Cap.
Last but not least, we have OncoSec Medical (ONCS) — is the prototypical high-risk, potentially high-reward biotech penny stock. And as high as the stakes are for investors, they’re even higher for patients with aggressive, hard-to-treat cancers like metastatic melanoma. At the risk of sounding overly simplistic, cancer is so hard to cure because it hides and grows among healthy human cells.
A number of companies have pioneered processes that try to ferret out cancer cells and programming the immune system to destroy them, without killing good cells. OncoSec’s approach involves “zapping” cancer cells, essentially making small holes in the cells that leave them vulnerable to destruction. In trials, the company’s use of so-called “electroporation” can inject Big-Gun anti-cancer drugs like IL-12 into the targeted cancer cell, without the severe side effects common to other treatments.
ONCS is a mad money be, though, as the company has negative return on assets, negative return on equity and negative operating cash flow. On the up side, if ONCS has the right approach and can hang in there long enough to demonstrate it conclusively, it could usher in a cure for terminal cancer.
Of course, OncoSec is extremely volatile and has no correlation to the market’s movements. Instead, ONCS largely will move based on the news that affects its operations and markets.
If you’re up for a wild ride with a penny stock, ONCS could be the perfect choice to keep life interesting.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.