3 Biotechs Worthy of a Stanley Cup

If these three drug makers were hockey teams, you can bet they'd have what it takes to compete at hockey's highest level.

May 28, 2014 at 4:35PM

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.

Team synergy
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.

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Seth Robey owns shares of Isis Pharmaceuticals. The Motley Fool recommends Isis Pharmaceuticals and Valeant Pharmaceuticals. The Motley Fool owns shares of Valeant Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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