Investing in biotech stock is a risky venture. The long path to profitability is littered with obsticles, and roughly 90% of all drugs that enter clinical trials fail to make it to the market. With those kind of odds working against you, the last thing an investor should want is a management team that isn't totally committed to making the company a financial success. After all, with all of that risk on the table, don't you want them to be hugely rewarded if they can make the business successful -- and feel the same pain investors' will if they can't?
One simple way to measure a management team's commitment is to see how much of the company the insiders own themselves. After all, if the people running the show have their own net worth on the line, it's probably a good bet they will care even more about the long-term trajectory of the stock price than you do.
To find a few of these companies that may be worthy of our investment dollar, I screened for biotechnology companies with market caps over $2 billion where insiders own more than 10% of the company, and I came up with a few interesting names. Let's learn more about each of them to see if they may be worthy of our investment dollars.
Hunting for big returns
First up is Puma Biotechnology (PBYI -0.77%), a midcap biotech with insiders who collectively own more than 18% of the company. Puma is focused on developing products that treat a range of cancers and has nine clinical trials under way.
Source: Puma Biotechnology.
The company's lead compound, PB272 (neratinib), has been posting exciting results recently, and the stock has been another huge winner for long-term investors. Shares are up more than sevenfold over the past five years based on the clinical progress of PB272. Analysts project peak sales for the compound as high as $6 billion by 2028.
If Puma can successfully bring PB272 to market and come anywhere close to hitting that peak sales estimate, then Puma's $4 billion market cap might look awfully small in the near future.
A hope for Parkinson's disease psychosis?
Up next is Acadia Pharmaceuticals (ACAD -1.47%), which has been an absolute dream stock for biotech investors -- the company is up more than 33-fold in value over the past five years! This huge amount of value creation has certainly been a big benefit to insiders, who collectively own more than 25% of the company.
Acadia has yet to get a single product to market, but the company is getting close with its lead compound Nuplazid, which has completed phase 3 clinical trials for the treatment of Parkinson's disease psychosis. Nuplazid certainly has blockbuster potential written all over it, as it would be the first and only drug on the market for this indication if it gets the green light from the Food and Drug Administration. Worldwide peak sales estimates are currently north of $3 billion.
Acadia is also exploring other indications for Nuplazid, such as schizophrenia and Alzheimer's disease psychosis, and the company is partnering with Allergan to create other products designed to treat chronic pain and glaucoma. If the company can successfully bring Nuplazid to market and come close to hitting peak sales estimates, Acadia investors should profit handsomely right alongside the insiders.
Stronger bones have lead to strong returns
Last on our list is Radius Health (RDUS -2.86%), where insiders own a massive 37% of the company stock. The company has also been another home-run winner for investors, up more than sixfold since going public in 2014.
Radius is focused on developing products that treat osteoporosis and other endocrine-mediated diseases. Its lead product is abaloparatide-SC, an injectable drug that has been shown to reduce the risk of new cerebral fractures for people with osteoporosis. This compound is nearing completion of phase 3 clinical trials, and the company is aiming for regulatory submission in the second half of this year.
Abaloparatide has shown great clinical efficacy when compared to Eli Lilly's osteoporsis drug Forteo, which rang up $1.2 billion in sales in 2013, and analysts project peak sales to surpass that of Forteo. The worldwide market for injectable osteoporosis drugs is currently worth more than $2 billion and is expected to grow by 12% per year. If Radius can succesfully bring this drug to market, it could certainly reach blockbuster status, and Radius could continue to reward investors for years to come.
One piece to the puzzle
While no single metric will ever be enough to establish a complete investment thesis, companies with insiders that have a huge financial stake in the future of the business can be a great hunting ground for winning stock ideas.
Biotech stocks have had a massive run over the past few years, so while each of these companies could certainly be a huge winner from here, I'm personally going to hold off investing in any of them until share prices pull back some. However, should that happen, you can bet these stocks would be certainly be on my radar for putting new money to work.
