Biotech stocks are among the riskiest places for you to invest, but it is also one of the most lucrative.
A great cure for a dreaded disease can lead to enormous profits. Just ask investors in Gilead Sciences, Inc. (NASDAQ:GILD), which quintupled investors’ money in just a few years with its hepatitis cure Sovaldi. But what sounds like a great story can turn to dust, as investors in Dendreon Corporation found after its vaunted prostate cancer treatment Provenge was shown to only improve lifespans marginally, and at a tremendous cost. It filed for bankruptcy in 2014, after hitting a high closing price of $57.67 in 2010.
There are many ways for biotech stocks to lose. Will a drug that promises much in an early trial prove to deliver results in later trials, and how bad will its side effects be? How quickly might the FDA move to approve a new drug, and how much will the drug maker be able to charge for it? How many patients does the drug serve, and how dramatic are the results?
Thanks in part to Vice President Joe Biden’s “Moonshot,” prospects for companies involved in cancer could not be better. There is a cost, in exchanging data and possible loss of intellectual property, but it is more than offset by the guarantee of “fast track” approval of cures by the U.S. Patent and Trademark Office, as well as the Food and Drug Administration, cutting time to market.
The following are seven stocks with breakout potential — some have game-changing drugs in the pipeline, while others are on the verge of realizing serious profit growth from their current lineup. There are no guarantees here, but a broad portfolio holds every hope for delivering you some winners, and maybe even a gusher.
Biotech Stocks to Watch: Supernus Pharmaceuticals (SUPN)
Supernus Pharmaceuticals Inc. (NASDAQ:SUPN) is a leader in seeking solutions for mental health problems like depression, ADHD, and Impulse Aggression (IA) that often accompanies it. These are conditions normally treated with antidepressants and small dose amphetamines, like Prozac and Adderall.
Supernus’ best-known “candidate” drugs are viloxazine hydrochloride (SPN-809 and SPN-812) for depression and ADHD, and molindone hydrocholoride (SPN-810) for ADHD with impulse aggression. Supernus’ current best-sellers are Trokendi XR, an epilepsy drug also known as topiromate, for the treatment of epilepsy, and Oxtellar XR for treatment of seizures. The company is trying to get Trokendi approved for use on severe migraine headaches.
Total revenue for the March quarter was $43 million, against $28.13 a year earlier, and growth has helped the company’s debt-to-assets ratio plunge, with long-term debt at March of just $7.08 million on assets of $188.63 million. Earnings are expected to grow by 125% over the next year before slowing to a mere 75% average over the next five years.
The number of people with ADHD and depression is huge, the drugs being used now are controversial, and the market could be hungry for what Supernus is delivering.
Biotech Stocks to Watch: Calithera Biosciences (CALA)
Calithera Biosciences Inc (NASDAQ:CALA) is one of those cancer therapy companies that could see enormous growth if its enzymes can treat and reduce cancer in the way early trials promise. The company has done a lot of work on tumor biology and the chemistry of cancer cells, which it is now trying to apply, meaning it could have a large pipeline of cures if the approach is right.
Calithera’s most promising drug is CB-839, which aims to starve cancer cells by removing glutaminase, which helps convert sugar into energy for these energy-hungry cells. It could have a one-two punch on cancer by first starving a tumor, then activating T-cells against the cancer.
CALA is now trying to determine which cancers this might be most effective against, including some types of breast cancer, lung cancer and leukemia. Trials on dosages, however, are only on Phase 1, and it could be several years before the drug is approved for use.
Calithera also has a compound called CB-1158 which depletes an enzyme called arginase, which depletes the amino acid arginine, which in turn can prevent the body’s own cells from attacking tumors. It has a marketing agreement with Mars Symbioscience which aids in development on CB-1158 at the cost of later revenue streams.
In the absence of revenue, investors are looking to news for a hint of success. This can be nerve-racking and lead to tremendous volatility. This is a very small stock with a total market cap of just $54 million, and the shares are not very liquid, but if you know anyone with cancer, this is the kind of company you want to see backed.
Biotech Stocks to Watch: Pacira Pharmaceuticals (PCRX)
Pacira Pharmaceuticals Inc (NASDAQ:PCRX) is focused not on a specific drug, but a drug delivery system it calls DepoFoam, which encapsulates drugs in a lipid structure so they are released more slowly into the body. It can be adjusted to deliver an immediate therapeutic dose, then a slower and steadier release.
This means it can deliver what would otherwise be a huge load of medication into an arthritic joint, or deliver a steady dose of something like insulin with a single injection under the skin. The focus is on pain relief.
Pacira, a $1.5 billion company, currently is on breakeven at a run rate of $249 million per year, which has allowed it to pay down debt and cut its debt-to-assets ratio to 25%. It has had positive operating cash flow for three of the last five quarters. Still, the company’s stock price has been cut nearly in half this year as analysts question how big the market is for DepoFoam.
Analysts are still divided, with Wedbush recently issuing an outperform rating, but with BMO calling PCRX a “sell,” questioning its ability to grow its niche, and noting its failure to outperform recent analyst expectations.
This is the kind of volatility that is to be expected in early-stage biotech stocks. Drug delivery is a safer place to be than drug discovery, but if you’re going to buy, wait until the market is nervous. While they’re simply estimates, PCRX earnings are expected to explode by 65% annually over the next five years.
Biotech Stocks to Watch: Lexicon Pharmaceuticals (LXRX)
Lexicon Pharmaceuticals, Inc. (NASDAQ:LXRX) originally focused on developing drugs for carcinoid syndrome, in which cancerous tumors secrete chemicals elsewhere throughout your body, causing various symptoms.
Then things got interesting when one of its drugs was shown to have potential effectiveness against diabetes — one of the most common of the western world’s chronic diseases.
Lexicon is offering two candidate drugs to treat carcinoid tumors, telotristat etiprate (LX1032) and sotagliflozin (LX4211). The company believes Sotagliflozin can also be effective in treating some types of diabetes, and it has other diabetes and pain medications in its pipeline
Shares in Lexicon doubled during 2015, helped by a licensing deal with Sanofi SA (ADR) (NYSE:SNY) that includes a $300 million down payment related to development of sotagliflozin against diabetes. Getting it into the market could earn the company another $1.4 billion — pretty good against a present market cap of $1.7 billion. In exchange, Sanofi will run the drug’s program on Type 2 diabetes, representing 95% of all cases.
This is the kind of serendipity you can get in drug discovery. A compound created for one, relatively rare condition may be shown to work on another, broader disease. To use an oil industry analogy a small well can turn into a gusher, and the anticipation of a gusher, by itself, can lead to big gains for investors.
With Lexicon’s short-term financial problems behind it, shareholders should look forward to the release of Phase 3 studies being run by Lexicon on Type 1 diabetes. If that shows results, you could be in for a very good year. The company already made great strides in actually producing a small operating income last year.
Biotech Stocks to Watch: Vertex Pharmaceuticals (VRTX)
Vertex Pharmaceuticals Incorporated’s (NASDAQ:VRTX) main target is cystic fibrosis, an inherited disorder for which there is presently no cure. Right now all doctors can do is work against symptoms, with antibiotics and sometimes organ transplants. About one person in 25 is a carrier for CF, and the disease’ name comes from the fibrosis and cysts that often form in the pancreas of those who suffer from it.
The company’s best-known drugs are Orkambi and Kalydeco, a combination therapy that aims to correct mutated genes in some 8,500 people with the disease. Orkambi is controversial because Vertex is asking $259,000 for a year’s treatment. This is actually less than the $311,000 it charges for Kalydeco, which is said to be better at improving lung function.
The controversy highlights one of the new risks in the drug business. It’s not enough to have a drug that works. Pricing can be a problem. In this case, VRTX justifies its price based on the small population that can benefit from an expensive discovery program.
In addition to other treatments in its pipeline against CF, Vertex is also researching compounds against cancer, pain and neurological disease. It is cutting into its losses on quarterly sales of about $400 million, and about one-fourth of its assets are burdened by debt. Analysts actually expect Vertex to turn profitable this year, with earnings estimates of $1.02 per share in 2016 followed by $3.17 next year.
Biotech Stocks to Watch: Ligand Pharmaceuticals (LGND)
Ligand Pharmaceuticals Inc. (NASDAQ:LGND) doesn’t have its own therapeutic pathway, a specific target disease or exciting drugs coming out under its brand name. Instead, it’s in the business of licensing research technologies to other drug companies, aiming to help them get drugs approved and into the market. LGND presently has licensing and partnership deals with 85 companies at various levels of development.
This gives Ligand a variety of revenue streams, including royalties, license fees and milestone payments. Among the drugs that presently pay it royalties are Promacta from Novartis AG (ADR) (NYSE:NVS) a bone marrow stimulator, and Kyprolis from Amgen, Inc. (NASDAQ:AMGN), a myeloma treatment. The company also markets Captisol from a company called Hovione, a chemical that allows drugs to be packaged to make them more soluble and stable. The company estimates that 45 companies have compounds using Captisol in development.
Being dependent mainly on deals for its systems and chemicals, Ligand revenue and profits can be very choppy, but they are pointing up. It had $14.6 million in revenue for the first quarter of 2015, and over $29 million for the same quarter a year later. And earnings? Analysts expect 46% annual growth for the next five years, though 2016’s profits are expected to slide by a few cents per share.
Biotech Stocks to Watch: Amicus Therapeutics (FOLD)
Amicus Therapeutics, Inc. (NASDAQ:FOLD) is in the business of “orphan” diseases. These are conditions that relatively few people have, and government incentives drive the search for cures.
While Amicus boooked zero revenues last year, it does have a candidate drug called Galafold to deal with Fabry Disease, a rare genetic condition of the nervous system, and it’s in Phase 2B studies of a cream called Zorblisa to treat epidermolysis bullosa, which causes the skin to blister. The Fabry Disease candidate, called Galafold, aims at a market now worth $1.2 billion, and Zorblisa could make even more money. Amicus recently raised $4.7 million in new equity to continue its research.
Because FOLD has no revenue, and a market cap of just $775 million, Amicus stock is very volatile. Rumors, drug pricing changes, trial results and FDA decisions can whip this stock back and forth. Lately those news events have been negative — the stock is down nearly 65% over the past year — but insiders have been buying, and eight analysts have a collective rating of buy on the stock.
One reason for optimism is a pre-clinical program Amicus has begun for what is called CDJK5 deficiency, a rare genetic neurological disease with no known treatment. This program was launched through the acquisition of a smaller company, MiaMed.
Getting any of these drugs into the market, and generating money, would be a huge win for Amicus, and many analysts now think it will get the job done.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.