Biotech stocks are notoriously risky investments. But not every biotech carries as much risk as others.
Three biotech stocks could be the least risky of all: Celgene (CELG), Ligand Pharmaceuticals (LGND 0.63%), and Gilead Sciences (GILD -0.72%). Here's why these stocks shouldn't be quite as volatile in the months and years ahead.
Celgene: Rock-solid growth
There's nothing like reliable earnings growth to keep a stock from sinking. Celgene can claim perhaps the most rock-solid growth prospects of any biotech.
The company's top-selling drug, Revlimid, continues to show strong momentum. Sales increased by 20% in 2016, and Revlimid's growth should continue with the possibility for additional indications on the way. Celgene shouldn't have to worry about biosimilar competition until 2022.
Otezla is Celgene's biggest growth engine right now. Sales for the autoimmune disease drug soared nearly 116% last year. Celgene also has a couple of late-stage studies underway for Otezla in new indications.
The biotech expects to launch 10 new drugs by 2022 that hold the potential to generate sales of $1 billion or more. Three of those drugs are especially promising. Celgene thinks that ozanimod, GED-0301, and luspatercept should achieve peak annual sales of $2 billion or more. The drugs could be on the market within the next two years if all goes well.
Ligand Pharmaceuticals: Diversification in one stock
One great way to reduce risk is to avoid putting all your eggs in one basket. Ligand Pharmaceuticals certainly achieves this goal. The company has over 160 programs that are in various stages of commercialization and development.
How can a biotech with a market cap of around $2 billion manage to build such a large portfolio and pipeline? Partnerships. Ligand has forged partnerships and licensing agreements with over 95 biotechs and pharmaceutical companies. Just think of a well-known drugmaker, and there's a pretty good chance it's one of Ligand's partners.
The key is that Ligand's technology platforms help other companies develop drugs more effectively. Ligand's top technology, Captisol, is a chemical that improves solubility, stability, bioavailability, and dosing of active pharmaceutical ingredients in drugs. Those are highly desired characteristics that keep drugmakers coming to Ligand.
Analysts project that Ligand should grow earnings by an average annual rate of 35% over the next five years. Even if a few of the company's partnered products stumble, Ligand has enough diversification that it should continue to perform well.
Gilead Sciences: Near the bottom
Would you rather walk across a log that's a few inches above the ground or one that's 100 feet above the ground? Most people would choose the former. It would be less risky, because you can't fall too much. That's kind of the scenario with Gilead Sciences right now.
Gilead stock has dropped more than 25% over the last 12 months. Declining revenue and earnings due to lower hepatitis C drug sales have hurt significantly. As a result, though, Gilead's shares look really cheap. The stock trades at less than nine times forward earnings.
Another important thing to consider is that Gilead is sitting on a cash stockpile of over $32 billion (including cash, cash equivalents, and marketable securities). The biotech's management has committed to using that cash to boost its growth prospects through acquisitions.
I think Gilead's share price isn't too far away from bottoming out. I also suspect that the right acquisition(s) could rejuvenate Gilead stock. Buying Gilead, in my view, is akin to walking on the log a few inches above the ground. You might fall -- but not too much.
Less risk still means some risk
Keep in mind, however, that all three of these stocks still have some risk. Pipeline setbacks can happen. New drugs might not perform as well as expected. There's the possibility of a scandal at any company.
Still, I think the risk for Celgene, Ligand, and Gilead is more acceptable than most biotech stocks. (And I've put my money where my mouth is, by the way. I own Celgene and Gilead Sciences stock.) There could be temporary downturns, but my view is that all three of these biotech stocks should be winners over the long run.