For beginning investors, the biotech industry can appear somewhat scary. Most biotech stocks aren't profitable, meaning they're arguably influenced by emotions (and clinical trial data) more so than any other industry.
However, biotech stocks can also offer significant growth opportunities for investors willing to do their homework and broaden their investment horizons. As with any industry, biotech stocks aren't without risk, but according to three of our Foolish biotech contributors, the right biotech stocks could deliver handsome rewards.
This biotech stock is in a (growth) class of its own
Sean Williams (Celgene): If you're looking to take the plunge into biotech, one of the top companies you should be considering is Celgene, which offers a nice mix of organic, collaborative, and inorganic growth opportunities.
The first component to Celgene's success is its robust organic growth, highlighted by multiple myeloma drug Revlimid and oral anti-inflammatory medicine Otezla. Revlimid remains the most popularly prescribed multiple myeloma drug in the U.S., and it's benefiting from higher prices, as well as higher volumes, longer duration of use, and steady market share. Full-year sales of Revlimid narrowly missed the $7 billion mark and grew by 20%. Otezla sales grew 67% in the fourth quarter from the prior-year period, and improved to $1.02 billion in 2016, up 116% from the prior-year period.
What makes both medicines so intriguing are their label expansion opportunities. Revlimid has an opportunity to become a maintenance therapy for multiple myeloma, as well as expand into a handful of lymphoma indications (diffuse large B-cell for maintenance and ABC-subtype first-line, first-line follicular lymphoma, and relapsed/refractory indolent lymphoma). Otezla has four additional indications it's being targeted at beyond its current label.
Beyond label expansion opportunities are Celgene's collaborations. Celgene currently has somewhere around four dozen collaborative partners that it conducts research with in the areas of oncology, immunology, and/or inflammation. Celgene fully understands that it can't research every disease or disease pathway, so by providing the seed capital for a bounty of first-in-class medicines, it has the potential to license the next cancer or anti-inflammatory blockbuster.
Lastly, Celgene can also dip its toes into the water from time to time and acquire promising products. In 2015, Celgene purchased Receptos for $7.2 billion to get its hands on next-generation multiple sclerosis drug ozanimod, which is still in development. With ozanimod thus far wowing in clinical stage studies, it looks well on its way to achieving its estimated annual peak sales potential of $4 billion.
Given Celgene's double-digit growth rate, transparent forecasting, and bountiful growth channels, it's the company that new biotech investors should consider buying.
Cory Renauer (Array Biopharma): If you're looking to get in on biotech investing for some excitement, this could be the stock for you. It doesn't have any products to sell yet, but that could change before the end of June if the FDA approves its melanoma candidate binimetinib, which is currently under review.
Binimetinib's chances of receiving a regulatory thumbs-up look better than average. During a clinical trial supporting the application, the majority of patients treated with Array Biopharma's experimental therapy survived without signs of disease progression for 5.5 months, versus just 1.6 months for those given a standard chemotherapy. It should also be noted this group of patients' disease had relapsed after treatment with available immunotherapies and had few treatment options left.
American oncologists diagnose about 76,000 new cases of melanoma each year, and around 20% fit the genetic profile binimetinib aims to treat. If the FDA green-lights the drug Array's stock would jump, and there's another potential catalyst right around the corner. Binimetinib in combination with another of Array's clinical-stage hopefuls, encorafenib, aims to treat a genetically defined group that probably comprises about half of all melanoma patients.
The combination's potential to earn an approval for treatment of the larger melanoma population looks solid as well. In a late-stage trial designed to support an application, the majority of patients receiving the combo therapy survived 14.9 months without signs of disease progression, versus just 7.3 months in a group treated with Roche's Zelboraf. The Swiss pharma's drug earned approval in 2011 for the treatment of this genetic subset of melanoma patients, and generates around $215 million in annual sales, giving us a hint of what Array Biopharma's combo therapy could earn if successful. The company intends to submit an application for the combo in this indication this June or July, so we won't have to wait too long to find out.
Array's stock has been on an incredible run, but it still looks like a bargain with a recent market cap of about $2.0 billion. Right now, success for its melanoma candidates seems like a slam dunk, but there are no sure things in biotech. In the event of a surprise upset, though, a clinical-stage pipeline with at least a dozen candidates in early- to late-stage development could provide a useful safety net of sorts.
The original biotech
Brian Feroldi (Amgen): Investors who are interested in dipping their toe into the biotech water would be best served to go after big, established companies that are gushing cash-flow and offer moderate growth prospects. If that sounds good to you, then I'd recommend putting Amgen on your watchlist.
Amgen has been selling drugs for decades, and it currently boasts more than a dozen products on the market. This includes a number of legacy drugs that are slowly fading away as well as a number of newly launched drugs that are growing rapidly.
One newly launched drug that looks particularly promising is Repatha. This PCSK9 inhibitor has been clinically proven to greatly reduces a patient's LDL-cholesterol levels (that's the bad kind). Thus far, Repatha's sales growth has been slow, but I think that's about to change. The company just announced results from its long-term FOURIER cardiovascular outcomes trial. While we won't have details of this trial for a few more weeks, Amgen said using Repatha "significantly reduced the risk of cardiovascular events." That's terrific news, as many providers and payers were pushing back on using the drug until this data was available. That suggests that Repatha's sales are poised to grow meaningfully from here.
All told, market watchers believe that Amgen will be able to grow its bottom line by more than 6% annually over the next five years. That's a respectable growth rate for a stable company that's trading for only 13 times forward earnings. Add in a dividend yield of 2.7%, and I think Amgen is a great biotech stock for newbies.