Now deep into the NHL's Stanley Cup Playoffs, it's clear what separates the winners from the losers. Looking at the biotech sector, some of those same traits can be the difference between winning investments and losing ones. If Isis Pharmaceuticals (NASDAQ: ISIS ) , Ligand Pharmaceuticals (NASDAQ: LGND ) , and Valeant Pharmaceuticals (NYSE: VRX ) were hockey teams, you just might see them win the Stanley Cup.
Shots on goal
You can't win without taking chances, and the more times you shoot the puck at the net the better your odds of scoring a goal. In health care, it's easy to take a lot of shots on goal when you have the technology to build a robust pipeline of drug candidates. Isis has such a pipeline, with 22 shots on goal in clinical trials, including 15 prospects in phase 2 trials.
Rather than using small molecules or biologics to block disease-causing processes, Isis' pipeline uses antisense technology to treat disease at the genetic level. By directly targeting the genetic machinery underlying a disease, Isis can tailor its drug candidates to a countless number of illnesses. That has allowed management to build a portfolio of early stage candidates, and then license them to big pharma partners to aid with development costs.
While Isis' only approved drug, Kynamro, has failed to provide meaningful revenue, some of its more recent shots on goal appear to be more promising. Just this month Isis reported positive readouts on two mid-stage trials for diabetes drug ISIS-GCGR Rx and blood thinner ISIS-FXI Rx. While both shots still have a ways to go, their potential for creating value through big pharma licensing could help shareholders score.
Scoring goals may be exciting, but it won't get you very far without a goalie to protect your assets. In health care, the best way to protect your assets is with intellectual property, and Ligand Pharmaceuticals has built up a portfolio of IP that it exploited for 56% revenue growth in 2013.
Ligand's business model involves acquiring pharmaceutical assets in various medical fields and at various stages of development, and licensing them to partners willing to front development costs in exchange for royalty payments. While that means Ligand won't see big pops from blockbuster drug approvals, it also means its programs are low risk, and its operations are dirt cheap.
Sitting at a market cap of only $1.4 billion (lower than Isis, which still operates at a loss), Ligand saw operating margins of 30.5% in 2013, well above pharmaceutical powerhouses like Merck (13.5%) and Johnson and Johnson (25.7%). With growth in its Captisol product for drug delivery and $20 million in annual operating cash flow, Ligand's growth should continue.
A salary cap in the NHL imposes a limit on the capital that management can employ to build a team. Allstar signings may be exciting, but that leaves less cash for building a team with a deep bench. Add to that, the complexity of hockey's free flowing substitutions, and assembling a group of players who work fluidly together is critical. In the health care space, Valeant Pharmaceuticals has stood out as a master of capital allocation, and recent news has it exploiting that capital to enhance synergies.
Like Ligand, Valeant isn't interested in plowing cash into R&D. Instead, Valeant is focused on making big-name acquisitions to grow its massive portfolio of branded prescription and over the counter products. It's forced to pony-up for companies with proven products, but smart capital allocation has unlocked value through portfolio and operational synergies.
Valeant is looking to build an even stronger team with its plan to join Bill Ackman's Pershing Square in acquiring Botox maker Allergan. Valeant already sits atop the market leaders in dermatology products, and management sees significant synergies with Allergan's product line.
Botox, Allergan's blockbuster aesthetic and neuromodulator treatment, saw 10.8% sales growth in 2013. That organic growth, coupled with the inorganic growth from recognizing SG&A synergies and slashing R&D, could help Valeant boost Allergan's already strong 30% operating margin closer to its 88% gross margin.
The bottom line
Whether it's hockey or another hobby, look for the characteristics it takes to succeed. More often than not, you'll be able to find simple connections between those hobbies and investment-worthy companies. In this case, Isis, Ligand, and Valeant each display the traits necessary to take home hockey's Stanley Cup.
Will this stock be your next multi-bagger?
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks 1 stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.