3 Biotech Companies for Young Investors

Take one look at the returns from biotech darlings Celgene, Biogen Idec, and Gilead Sciences over the past year. If that doesn't get you excited as an investor, then you had better check your pulse. The further back you go, the better it gets. Had you staked a position in the companies above 10 years ago, you would have captured returns of 1,626%, 610%, and 833%, respectively. These companies above may not be done growing, but with market caps ranging between $50 billion and $80 billion, it would be misguided to expect similar gains from them going forward.   

While we cannot travel back in time (yet) to make our present selves look like investing geniuses, we can attempt to learn from the past while searching for the next big biotech companies. Young investors who are not afraid to adopt a buy-and-hold mentality could benefit the most from finding the next gem. The eye-popping returns of biotech firms coupled with the compounding effect enjoyed by investors who get an early start can be a powerful combination. Here are three companies that could trounce the market in the next 10 years.

Building momentum
It may not seem too impressive on the surface, but Momenta Pharmaceuticals (NASDAQ: MNTA  ) has the makings of a game-changing biotech company. The company has developed a novel platform that greatly speeds the development and characterization of complex biological compounds. Unlike more traditional small molecules, therapeutic proteins are massive molecules whose exact chemical structure and makeup can vary from one production method to the other. Simple folds of subunits within the protein can drastically affect its efficacy and toxicity.

Momenta's platform swipes away uncertainty and risk from product development by making connections between a drug's chemical structure, manufacturing process, and mechanism of action. The approach has attracted the attention of Novartis and Baxter Pharmaceuticals, which are going all-in on the future of biosimilars, or generic biologics. Although the company's technology was proven successful at an early stage, its first generic drug quickly succumbed to a flood of competition. An astounding $180 million in profits on $283 million in revenue in 2011 fell a mind-numbing 97% as a result.  

Despite an early collapse, Momenta has a promising future ahead of it. A partnership with Baxter could produce up to six biosimilars -- the first of which could be up for regulatory approval by 2014. The company is also developing a novel oncology drug on its own, although it is still in phase 1 trials. It will remain a high-risk investment until it can generate more revenue. But if Momenta can diversify its revenue stream and build out its product portfolio, it should be able to capture the ridiculous profit margins of 2011.

Incite growth into your portfolio
Investors looking for the next high-growth biotech company should certainly spend time researching Incyte (NASDAQ: INCY  ) . The company sports a handful of the most promising JAK inhibitors, which are garnering high level interest throughout the pharmaceutical industry. The molecules have big potential in treating various cancers and inflammatory diseases such as rheumatoid arthritis and psoriasis.

Incyte and Novartis have teamed up to market Jakafi -- the company's first and only approved drug -- for myelofibrosis (a bone marrow cancer). The pair is also evaluating the novel compound in four additional cancer trials; one phase 3 and the balance in phase 2 development. Meanwhile, Eli Lilly has tapped Incyte's baricitinib for inflammatory diseases. The drug crushed its phase 2 trial for rheumatoid arthritis late last year and is wrapping up a phase 2 trial for psoriasis.

With a market cap of just $3 billion and plenty of positive developments, Incyte could be a good early candidate for the next big biotech company. Investors will have to practice extreme patience, though, since the next phase 3 data won't be published for several years. 

You call it cheating -- I call it looking ahead
Who said biotech investments are confined to health care and pharmaceuticals? Solazyme (NASDAQ: SZYM  ) has nothing to do with either, but forward-thinking investors won't let that stop them. The industrial biotechnology company is developing a novel renewable oils platform that could one day produce commercial quantities of in-spec chemicals for a variety of applications including cosmetics, flavors and fragrances, specialty chemicals, and fuels.

Solazyme is feverishly working on building its first production capacity in Brazil, the United States, and Europe. When the last of the three facilities is commissioned in early 2014, the company will own an annual nameplate oils capacity of 125,000 metric tons. With just 8,500 metric tons of capacity at the beginning of 2013, it is easy to see why investors are excited about the big increases in revenue coming their way.

Potential will likely push shares higher over the next year, although Solazyme still needs to commercialize all of it oils at industrial levels of production to become profitable. The company hasn't missed any major milestones to date, but it's clear that big challenges lie ahead. Despite the risks, Solazyme remains the best investment in industrial biotechnology.

Foolish bottom line
Will one of these companies become the next big biotech company? It is much too early to say, but young investors looking for great buy-and-hold opportunities should consider the innovative group. Each comes with more risks than more mature companies such as Celgene, Biogen, or Gilead, but that also makes the potential returns far greater. All three are on my watchlist and will be added to my portfolio in the next year. Will you be joining me? Let me know in the comments section below.

While you can certainly make huge gains in biotech prospects, the best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.


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