The bull market turned six-years-old this week, which is pretty amazing. It’s been quite a ride. In that time, the Dow Jones Industrial Average has charged ahead more than 150%, the S&P 500 180% and Nasdaq 250%. One group that has been at the forefront of this bull market is biotech stocks.
In fact, the past five years have been nothing short of extraordinary for this sector. The Nasdaq Biotechnology (INDEXNASDAQ:NBI) has surged more than 450% from 650 to 3,600. That outperformance has continued even amid the recent volatility, with NBI gaining 13% so far in 2015 while the S&P 500 is flat.
So, what’s been behind the eye-popping gains? First, fundamentals from many companies have strengthened as they develop new products, grow existing products and enjoy patent protection that lasts well into the future.
Secondly, earnings growth for the market as a whole has been somewhat lackluster, sending a lot of growth investors toward biotech stocks. And the low interest rates we’ve seen these past five years have enhanced the value of growth stocks like biotech stocks, since they generate their cash flows further out in the future and therefore benefit more from a lower discount rate.
Biotech stocks have always been some of my favorites to invest in. In my GameChangers service, we’ve owned 11 biotech stocks on our Buy List with nine winners — eight of which we sold for double-digit gains, including near doubles in Ariad Pharmaceuticals, Inc. (NASDAQ:ARIA) and Intercept Pharmaceuticals Inc (NASDAQ:ICPT).
The good news is that there are still exciting opportunities in biotech stocks. So, biotech is a sector I continue to watch closely. Biotech stocks do have reputations for being risky, and you do have to be careful.
There are plenty of companies still in the development stage that aren’t yet profitable, but there remains a ton of potential with more than 5,000 biopharma products in clinical development, not to mention plenty of big revenue-producing products already on the market.
I think all investors should consider at least some exposure to stocks in biotech, healthcare, medical devices and related areas. Let me tell you about two I like right now:
Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN): A Niche Leader
Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) specializes in developing drugs to treat rare medical conditions. The Food and Drug Administration (FDA) has developed the so-called “orphan drug” program to provide incentives — tax breaks, enhanced patent protection, etc. — for companies to come up with treatments for conditions that affect fewer than 200,000 people.
Orphan drugs may not receive as much attention as potential blockbusters, but there is a somewhat easier and faster regulatory environment, premium price and less competition.
Alexion is a leader in this niche as it develops treatments for diseases and disorders that can prove fatal without treatment. Alexion has several promising drugs in development, and it already has a product on the market called Soloris. Soloris treats a life-threatening genetic blood disorder called paroxysmal nocturnal hemoglobinuria (PNH), which can lead to blood clots, heart attacks, strokes, organ damage and even death.
Before Alexion developed Soloris in 2007, treatment consisted of managing the symptoms and occasionally a bone marrow transplant. Without treatment, one third of patients did not live more than five years past diagnosis. So, you can see the need Soloris filled.
ALXN management sees further potential uses as Soloris is able to inhibit a specific component of the immune system and limit inflammation. In fact, it is in late clinical trials for a variety of transplant related issues.
Soloris is also an example of the premium pricing we talked about, as the treatment comes with a $400,000 price tag. Still, its life-saving capabilities are not lost on public and private insurers, and the willingness to cover the treatment has resulted in significant sales growth.
Alexion’s revenues have increased from $72 million in 2007 to $2.23 billion last year. Profitability has grown significantly as well, as earnings have grown from a loss of 64 cents per share in 2007 to an adjusted gain of $5.21 per share a year ago.
I should mention that Alexion is about to undergo a leadership transition, with founder Dr. Leonard Bell due to step down as CEO on April 1. He will be replaced by Chief Operating Officer (COO) David L. Hallal, who I feel is a natural successor. Hallal has been the COO since 2006, which is shortly before ALXN began entering its commercialization phase with Soloris. I expect good things from Hallal and believe Alexion will continue to do well under his leadership.
Lastly, ALXN is a possible takeover candidate. With cash flow Soloris to extend potentially beyond 2021, I wouldn’t be surprised to see one of the pharmaceutical giants be interested in its growing gross profits.
Given all this — ALXN’s continued growth, strong pipeline and takeover potential — I see a double-digit move higher from current prices.
Cardiovascular Systems Inc (NASDAQ:CSII): More Growth to Come
Another company I like right now is a leader in a medical problem that affects millions of people, more than 13 million Americans to be exact. I’m talking about coronary artery disease, which is the number one killer in the U.S.
Coronary artery disease occurs when a build-up in fat and cholesterol in the blood sticks to the inner walls of arteries, causing a decrease in blood flow that can lead to a heart attack.
There’s also peripheral artery disease (PAD), which is less well known but still impacts between eight and 12 million Americans. PAD occurs when plaque builds up in leg arteries and is often a pre-cursor to CAD. Because the symptoms are vague, PAD often goes undiagnosed.
CAD and PAD are normally treated by lifestyle changes (exercising more, a healthier diet, losing weight, and quitting smoking), but doctors may also recommend drugs to lower the cholesterol or use catheters — a minimally invasive way to try to clear arteries in more serious cases.
While there are many companies to watch in the medical device industry, a standout in catheter-based systems for treating CAD and PAD is Cardiovascular Systems Inc (NASDAQ:CSII).
CSII products have gained wide acceptance in the medical community, which has driven outstanding top-line growth. Since its merger with Replidyne in 2008, CSII sales have more than doubled from $56.4 million to $136.6 million in the last fiscal year. In the first six months of the current fiscal year, revenues continued to grow at a rapid pace, increasing 38.6%.
Gross profit benefitted from increased manufacturing efficiencies with the higher volume, rising over 41%. I found this to be very encouraging, as gross margin stability will lay the groundwork for Cardiovascular Systems to become profitable.
CSII is not profitable yet as management continues to invest heavily in the future with expanded marketing capabilities and additional trials, but volume growth is a key to changing that.
Looking ahead, there are 10 pipeline projects either in process or under evaluation, as Cardiovascular Systems is looking to provide doctors with new and safer access to the foot, thigh and arm. Plus, developments in insurance reimbursements have been highly positive.
Keep in mind that CSII is currently only a domestic company, but once its applications are approved for global sales in Europe and Japan, growth should get an additional boost.