Biotech research is continuously evolving because of new discoveries and trial successes and failures, and that makes investing in the industry tricky. If you don't do your due diligence, you can wind up losing a lot of money. So, with that in mind, I went searching for lesser-known biotech stocks that are worth a closer look and discovered ChemoCentryx (CCXI) and Bio-Techne Corporation (TECH -0.27%).
Read on to learn if these two stocks are worth adding to your portfolio.
On the cusp of becoming a commercial-stage company
ChemoCentryx is a small market cap biotech that's conducting three registration-supporting clinical trials involving patients who have a high unmet need for new treatment options.
IMAGE SOURCE: GETTY IMAGES.
Its most advanced trial is a phase 3 study of avacopan, an oral inhibitor of the complement C5a receptor, for use in antineutrophil cytoplasmic antibody (ANCA)-associated vasculitis (AAV), a group of diseases that cause small vessel inflammation that can damage organs, including the kidney.
C5a is a receptor involved in triggering inflammation located in the complement cascade, a system that works together to keep viruses and bacteria at bay. By inhibiting C5a, a downstream target in this system, rather than C5, an upstream target, ChemoCentryx thinks avacopan can work better and pose less of a safety risk in a variety of indications than C5 inhibitors, including blockbuster drug Soliris.
In phase 2 studies, adding avacopan to cyclophosphamide, a chemotherapy, outperformed standard therapy consisting of high-dose prednisone, a steroid, plus cyclophosphamide. If phase 3 results confirm that phase 2 data, then a filing for approval in the U.S. could happen as soon as next year. According to management, the phase 3 study is expected to complete enrollment this summer.
The phase 3 data might not be necessary for avacopan's approval in the EU, though, because European regulators are already considering avacopan for conditional approval based on its phase 2 results.
A regulatory green light would be significant for ChemoCentryx investors because avacopan could displace the use of steroids, but ANCA-AAV isn't the only indication that could turn avacopan into a commercial success. Avacopan is also in a registration-supporting trial for C3 glomerulopathy (C3G), a rare disorder requiring dialysis and, often, kidney transplant. C3G patients who receive dialysis or transplant often see their disease return, and currently, there aren't any effective, FDA-approved treatments. Avacopan's study is about 30% enrolled, and according to clinicaltrials.gov, its estimated primary completion date is February 2019.
The third trial that could support a regulatory OK for ChemoCentryx is for the use of another drug, CCX140, in certain patients with focal segmental glomerulosclerosis (FSGS). In FSGS, excessive protein in the urine can destroy kidney function, leading to transplant. Currently, there aren't any approved treatments for these patients, so an approval would be a big advance for patients.
It's a good thing to have three trials in progress that could support approvals, but these trials are expensive. In the first quarter, the company's R&D costs were $14.7 million, up from $10 million last year, and in 2018, cash burn is expected to be between $65 to $75 million. Fortunately, ChemoCentryx's balance sheet is solid. It had $177 million in cash exiting Q1, and that should be enough to last it into 2019, when results from these trials could begin being reported.
Overall, eventual approvals could move the needle for the company, but ChemoCentryx won't pocket all of the profit. ChemoCentryx has licensed ex-U.S. and China rights on these drugs to Vifor Pharma in exchange for $105 million in upfront cash and double-digit royalties on sales.
A shovels-and-picks approach to biotech
It's been said that it was the makers of picks and shovels, not the prospectors, that made the most money during the gold rush. Perhaps focusing on the companies that are supplying products to biotech companies is similarly a better bet than buying the biotech companies themselves.
If so, then investors ought to take a close look at Bio-Techne Corporation, $5.6 billion market cap company that sells the supplies needed by biotech researchers to develop drugs. Bio-Techne's been around since 1981, but interest in the company has really taken off lately because of a spike in researching drugs targeting DNA and ribonucleic acid (RNA), a nucleic acid that acts as DNA's messenger for controlling protein expression.
In 2017, the company's biotech business accounted for 64% of its total revenue, and that's great news for investors because that business has the best profitability. Biotech products produce an operating margin that's in the high 40% range, and for comparison, operating margins in its diagnostics products business and protein platforms business are only in the high 20% range and low double-digits, respectively.
Because biotech is accounting for more of its revenue, and those products are more profitable, Bio-Techne's earnings have been improving. In Q1, adjusted earnings per share (EPS) climbed 25% year over year to $1.21, and over the past 12 months, the company's EPS has increased to $2.97.
TECH Operating Margin (TTM) data by YCharts.
In fiscal 2017, Bio-Techne's sales were $563 million, yet there's plenty of opportunity for sales to go higher because its addressable market exceeds $5 billion.
There's no guarantee Bio-Techne will capture a greater share of its target market, but management is confident in its chances. The company is targeting $1 billion in sales and $400 million in operating earnings in 2022. For perspective, Bio-Techne's fiscal 2017 operating income was only $122 million.
A boost in U.S. funding for healthcare research is a big tailwind that could help it deliver on its target, but the company's also benefiting from increasing demand in China and the development of biosimilars, which are inexact copies of specialty biologics that have lost their patent protection. The biosimilars market is expected to grow into the billions of dollars per year as patents expire on leading biologics, including the $18 billion per year autoimmune disease drug Humira. Biosimilars to Humira could emerge later this year in Europe and as early as 2023 in the United States.
Overall, if you believe funding for drug research will continue climbing worldwide (I do!), then Bio-Techne is arguably a better stock to buy than ChemoCentryx. The potential reward associated with ChemoCentryx is big, but there's no guarantee its trials will succeed. If its trials fail, then investors could lose a lot of their investment. Bio-Techne's far from a risk-free investment, but its revenue isn't dependent on any one trial success or failure, and that pick-and-shovel approach makes it a more conservative way to profit from biotech's boom.
