Biotech stocks have to be the ultimate risk and reward equities. No other sector comes close to the return potential of the sector. Just take a look at the gains for the SPDR S&P Biotech ETF (NYSE:XBI). The ETF and sector benchmark has managed to post average annual returns of nearly 19% over the last decade. That’s pretty insane and underscores the kind of potential that biotech stocks can have.
But they also come with a ton of risk to get that return. They don’t call them lotto tickets for anything. Many biotech stocks are just one bad trial away from crashing, burning and causing plenty of heartache for their shareholders.
However, there are ways to hedge your bets.
Aside from going into a broad ETF like the XBI, the key is making sure that investors focus on developmental pipelines, partnership and plenty of cash on their balance sheets. Having a drug actually in the marketing stages doesn’t hurt either. It’s here that investors can find success in the sector.
With that in mind, here are five biotech stocks that have plenty of potential.
Galapagos NV (GLPG)
A good way to spot top clinical-stage and early-entry biotech stocks is finding those firms with top-notch partners. And Galapagos NV (NASDAQ:GLPG) couldn’t have picked a better partner than biotech royalty Gilead Sciences (NASDAQ:GILD). Earlier this year, GILD upped its partnership stake in GLPG via a nearly $4 billion payment as well as a $1.1 billion equity stake. All in all, Gilead will now own 22% of Galapagos.
There’s a good reason why GILD would want to pony up that kind of cash for the biotech firm. It needs to fill potential revenue holes in its aging pipeline and GLPG has the goods.
Galapagos has one of the richest and largest development pipelines around. The drug company has multiple late-stage programs as well as 25 different drugs in discovery/early trial stages. This includes its potential blockbuster in Filgotinib. This was the first partnership with Gilead and after impressive phase-3 data for the rheumatoid arthritis drug, the duo submitted a marketing application with the FDA earlier this month. Meanwhile, successful initial idiopathic pulmonary fibrosis data, as well as beginning trials for new cystic fibrosis medicines, could all bare significant fruit for GLPG.
That’s an impressive amount of “shots on goal” for a clinical-stage biotech stock. The best part is, based on the rich deal, the speculation is that Galapagos wanted to stay independent rather than receive a full buyout from GILD. This means it can make the full use of that pipeline with future royalty and milestone payments. It also means investors in GLPG stock can as well.
Blueprint Medicines (BPMC)
There are a few mega-trends in the world of biotech stocks. Gene therapy is a major one. Another is the concept of small-molecule drugs. Small-molecule drugs are generally more stable than their biologic counterparts and can more commonly be taken as pills as opposed to injections. Though some injected biologics can be taken outside of a healthcare setting (notably Abbvie’s (NYSE:ABBV) Humira), many need to be administered by a doctor, nurse or other medical professional. This makes small-molecule drugs better for accessibility and ongoing treatments.
This focus on small-molecule drugs makes Blueprint Medicines (NASDAQ:BPMC) a potential real winner among the biotech stocks.
BPMC current roster of developmental drugs focuses on various cancers. And the beauty is that pill-delivery system. It really works. Avapritinib — which treats systemic macrocytosis (SM) and gastrointestinal stromal tumors (GIST) — managed to shrink these tumors in 86% of the patients treated. That’s a high percentage for any study. The late trial success allowed Blueprint to submit a marketing application to the FDA for it. The firm has also seen great success targeting other cancers in several other early trials — with the small –molecule delivery system leading the way.
These successes allowed BPMC to plot its course of action for next year. That should include two marketed drugs, four in application stages and more than a dozen in trials and preclinical investigation. Given the wins already, there’s no reason to think blueprint won’t get there.
Ligand Pharmaceuticals (LGND)
If one partner is good, then having over 100 is better. And this is the case for Ligand Pharmaceuticals (NASDAQ:LGND). LGND counts big shots like Amgen (NASDAQ:AMGN), Pfizer (NYSE:PFE) and generic drug specialist Teva (NASDAQ:TEVA) as some of partners/ licensees. The key is Ligand’s business model.
Ligand doesn’t actually develop drugs itself. What it does is provide development platforms that help other biotech stocks and pharmaceutical companies create drugs more effectively. That huge difference has allowed Ligand to quietly become one of the sector’s secret stars. Ligand gets upfront payments, development milestones and backend payments on sales after the drugs hit the marketing stages. So far, 17 drugs using Ligand’s tech have been approved. But more are in the late stages of trials.
Perhaps the best part is much of the development risk is pushed on the firms using LGND’s tech. Ligand gets paid something either way.
As a result, LGND is one of the few biotech stocks out there that is actually profitable. Moreover, the steady stream of royalties has allowed the firm to build up a massive war chest of just under $1.4 billion in cash on its balance sheet. While it’s too early to talk about dividend potential, LGND could be on its way to initiating a payout in the future as more drugs hit pharmacy shelves using its technology.
And yet, shares of LGND could be a massive bargain. After some hype has left the stock, investors can score shares about 30% below their year-aho levels.
Vertex Pharmaceuticals (VRTX)
Dominating a disease can mean some big-time revenues for biotech stocks. When it comes to cystic fibrosis, Vertex Pharmaceuticals (NASDAQ:VRTX) is pretty much the only game in town. It’s three FDA-approved drugs — Kalydeco, Orkambi, and Symdeko — have a monopoly on the disease.
]This massive foothold on cystic fibrosis treatments have made VRTX a cash cow for investors. Last year, Vertex managed to sell more than $3 billion worth of medicines to treat the disease. However, this year is looking to eclipse that rate. In 2019, VRTX expects to report product revenue of $3.5 billion to $3.7 billion. That puts it on track reap more than $5 billion in annual sales by 2024. Those robust sales have also helped balloon its cash balance to nearly $4 billion at the end of the quarter.
And the future is robust for Vertex as well.
The firm is working on a proved combination therapy of its three drugs to help boosts further, while Symdeko earlier this year received approval from the FDA to be used in children. The best news for VRTX could be a recent foray into gene editing that could treat cystic fibrosis completely. Partnering with CRISPR Therapeutics (NASDAQ:CRSP), Vertex recently started the first human trial using a CRISPR-based product. That drug — CTX001 — also received FDA fast track status and could be a huge revenue booster if approved.
With its strong dominance, hefty cash flows and continued sales increases, VRTX has quickly become one of biotech’s brightest stars.
BioMarin Pharmaceuticals (BRMN)
Thanks to continued advances in science and technology, we’re able to tackle more rare and orphan diseases. And thanks to their generally small patient population sizes and difficulty of treatment, drugs targeting this niche of the market often come with sky-high prices. For biotech stocks like BioMarin Pharmaceuticals (NASDAQ:BMRN) this is a revenue win.
BRMN has made a name for itself as by only targeting rare diseases and has the most success in this area. The firm currently has seven drugs on the market targeting illnesses such as phenylketonuria and Batten disease. BioMarin has continued to see rising sales and prescriptions for these medications. For example, during the last reported quarter, Vimizim and the PKU franchise managed to generate year-over-year revenue growth of 33% and 23%, respectively. All in all, total revenues for BRMN topped $460 million.
And those revenues could keep soaring into the future.
For one thing, rare disease medications often come with longer exclusivity rights. This gives BMRN a very long runway to ward off generic competition. Secondly, rare disease medications generally have no trouble getting covered by health insurers. This allows patients to actually get their hands on the high-priced meds in the first place.
Adding in BioMarin’s beefy pipeline and you have a recipe for success. Analysts expect the firm to finally start turning a profit by 2020 — especially if its new hemophilia drug turns out to be a blockbuster.
Disclosure: At the time of writing, Aaron Levitt was Long CRSP and the iShares NASDAQ Biotechnology ETF (IBB) — which owns all the stocks on this list.