The risks associated with trial failures, competitive threats, and patent expirations make biotech stocks some of the riskiest stocks investors can buy, but that doesn't mean that you should ignore every biotech stock. For example, these three investors think that now could be a good time to add a little Supernus Pharmaceuticals (SUPN 2.58%), Lexicon Pharmaceuticals (LXRX 1.74%), and Arena Pharmaceuticals (ARNA) to growth stock portfolios. 

Meet the next generation of diabetes treatment

Sean Williams (Lexicon Pharmaceuticals): If you're a long-term investor, but one with a higher tolerance for risk than the average investor, I'd steer you to take a closer look at Lexicon Pharmaceuticals, which has lost more than half of its value since peaking in 2016.

A man in a suit points at a drawn image of a lightbulb containing a U.S. dollar sign.


The allure of Lexicon is that it's developing a first-of-its-kind diabetes drug, known as sotagliflozin, which is an inhibitor of glucose transport proteins SGLT1 and SGLT2. The experimental drug is designed to block glucose absorption in the intestines (mediated by SGLT1) and kidneys (mediated by SGLT2), allowing the patient to excrete excess glucose through their urine. If this sounds somewhat familiar, it's because SGLT2 inhibitors have been all the rage for years. Not only have they aided with glycemic balance, but they've also come with the welcome side effects of lower systolic blood pressure (the first number in a blood pressure reading) and weight loss for patients. The thinking here is that combining SGLT1 and SGLT2 could improve glycemic balance even more than with just SGLT2 inhibition.

What's also unique about Lexicon's lead drug is that it's designed to treat type 1 and type 2 diabetes. SGLT2 inhibitors are strictly for use in type 2 diabetes, which admittedly makes up between 90% and 95% of all cases. In September, Lexicon published its phase 3 study data from its type 1 diabetes trial in the esteemed New England Journal of Medicine. The bright side was that there was a least squares mean reduction in A1C from baseline of 0.79% in the patients on sotagliflozin, compared to 0.33% for those taking placebo. Additionally, every secondary endpoint achieved statistical significance for sotagliflozin over the placebo.

The downside? There was a notably higher rate of diabetic ketoacidosis (3%) in the sotagliflozin arm relative to the placebo. Also, diarrhea rates and genital mycotic infection rates were higher for the sotagliflozin patients relative to the placebo. There are clear concerns that if these safety concerns carry over into its type 2 studies, it could limit sales of the drug. 

However, Lexicon has a few positives in its corner. Namely, that SGLT2 inhibitors face similarly higher diabetic ketoacidosis rates, yet they're selling very well, and that it has Sanofi (SNY -0.15%) as its partner. Sanofi is heading up the type 2 diabetes trials, and is covering a good portion of the expenses. What's more, Sanofi has a long history of successfully launching blockbuster drugs, which I suspect sotagliflozin could become by around 2023 or 2024.

Put plainly, Wall Street isn't giving this biotech enough credit, which makes it an attractive stock for investors to consider buying right now.

Fast-growing profits with two lottery tickets

Brian Feroldi (Supernus Pharmaceuticals): Most small-cap biotechs are still in the money-losing stage of their lifecycle, which makes them extremely speculative investments. However, there are a handful of exceptions. One of them is Supernus Pharmaceuticals, a commercial-stage biotech that is focused on diseases of the central nervous system. This company has been cranking out fast-growing profits since 2015, which is a big reason why its stock has crushed the S&P 500 over the last few years.

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Supernus' profit growth is driven by the success of two drugs that are used to treat epilepsy: Oxtellar XR and Trokendi XR. Last year sales of these two drugs climbed 40% and allowed Supernus to pull in more than $302 million in total revenue. Better yet, the soaring top line allowed the company's adjusted net income to grow by 90% to $67 million. With management calling for peak sales of Oxtellar XR and Trokendi XR to reach $800 million, the odds look good that this fast growth will continue for the foreseeable future.

Supernus' pipeline also should provide investors with reasons for optimism. The company boasts two compounds in phase 3 development that, if approved, could also turn into top sellers. The first is SPN-810, a potential treatment for impulsive aggression. The second is SPN-812, which is being studied as a treatment for attention hyperactivity disorder. Late-stage data readouts are expected for both drugs by the first quarter of 2019.

In a nutshell, Supernus is a winning stock that offers investors fast profit growth in the near term and the potential for massive upside if SPN-810 or SPN-812 pan out. That's a combination that any biotech investor should find appealing.

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A biotech stock that's back on track

Todd Campbell (Arena Pharmaceuticals): Arena Pharmaceuticals has been one of biotech's most hated stocks since the commercial flop of its once highly touted obesity drug, Belviq. However, opinions seem to be changing following positive mid-stage trial results in pulmonary arterial hypertension (PAH) and ulcerative colitis (UC).

Good news first came last summer when the company unveiled positive phase 2 results for its PAH drug, ralinepag, an oral prostacyclin receptor agonist. Patients receiving ralinepag had a statistically significant reduction from baseline in pulmonary vascular resistance (PVR), and if soon-to-start phase 3 trials pan out, then ralinepag could match up favorably to J&J's Uptravi, a drug that works similarly, but has a shorter half-life and larger peak-to-trough fluctuations. Uptravi is selling at an annualized clip of $560 million exiting Q1 2018, so a victory in phase 3 could be worth nine figures per year in sales for Arena Pharmaceuticals. 

More good news came in March 2018 when Arena Pharmaceuticals reported positive phase 2 data for its ulcerative colitis drug, etrasimod. In etrasimod's trials, 33% of patients achieved clinical remission as measured by the three-component Mayo Clinic score, and 24.5% of patients achieved clinical remission as measured by the Total Mayo Clinic score. For comparison, the remission rates were 8.1% and 6%, respectively, in the placebo arm. An S1P-modulating drug, etrasimod's mechanism of action is already somewhat validated by the fact that the FDA-approved S1P modulator Gilenya has been used in multiple sclerosis patients since 2010. If its phase 3 studies succeed, then etrasimod could be a needle-mover because UC treatment is a blockbuster market.

Finally, there's a possibility that the company will deliver even more good news soon. In Q2 2018, Arena expects data from a phase 2 trial for its Crohn's disease pain medicine, APD371, a cannabinoid receptor 2 agonist. Since there's an important need for non-opioid pain medications, a win there could be significant, too.