Think of any big biotech. What comes to mind? Perhaps you thought of the blockbuster drugs the company already has on the market. Maybe you considered its pipeline candidates or its solid cash flow.
Now think about the same biotech 10 or 20 years ago. For most of the biggest companies, the picture a decade or two ago looked much different than it does today -- even the biggest biotechs were once much smaller.
Which companies that are relatively small right now could become the big biotechs of the future? Here's why I think that Editas Medicine (EDIT 4.22%), Ligand Pharmaceuticals (LGND -2.06%), and Exelixis (EXEL 2.24%) could be monster biotech stocks in the making.
1. Editas Medicine
Editas Medicine's market cap currently stands at $1.5 billion. The biotech doesn't have any approved products; Editas doesn't even have a drug in clinical testing yet. But I think the company has tremendous potential.
CRISPR gene editing has been called the biggest biotech discovery of the century. Editas is one of a handful of small biotechs pioneering the technology, which uses bacterial enzymes to cut DNA sequences at targeted locations.
The biotech's lead candidate is EDIT-101, a CRISPR gene-editing therapy for Leber congenital amaurosis type 10 (LCA10), the leading cause of hereditary childhood blindness. Big drugmaker Allergan is partnering with Editas on EDIT-101. The two companies plan to file for approval in October 2018 to initiate clinical testing of the therapy in humans.
LCA10 should just be the beginning for Editas, though. The biotech is also researching the use of CRISPR gene editing in treating seven other genetic diseases. And Editas could still just be scratching the surface of its potential opportunities: There are over 10,000 diseases that are caused by defects in a single gene, according to the World Health Organization.
2. Ligand Pharmaceuticals
Ligand Pharmaceuticals currently has a market cap of around $5.4 billion. I think that it's likely to grow much larger in the future.
"Shots on goal" is the underlying business model for Ligand. The company focuses primarily on platforms that help other drugmakers more effectively develop new drugs. Ligand's major technology platforms are OmniAb and Captisol. OmniAb helps drugmakers discover antibodies, while Captisol improves solubility, stability, and bioavailability of active pharmaceutical ingredients (APIs).
Ligand claims over 165 partnered programs with more than 95 partners, including many of the largest biopharmaceutical companies in the world. Roughly 9% of those programs relate to drugs that are already on the market, notably including Amgen's Kyprolis and Novartis' Promacta. Thanks to these marketed drugs, Ligand's profits continue to soar.
What I really like about Ligand, though, is that the company could have many more success stories on the way. The next big winner is likely to be Sage Therapeutics' postpartum depression drug brexanolone, which relies on technology licensed from Ligand. The Food and Drug Administration is scheduled to announce its decision on approval for the drug by Dec. 19, 2018.
Exelixis edges out Ligand as the largest of these three monster-biotechs-in-the-making, with a market cap of nearly $5.6 billion. Most of Exelixis' success so far has stemmed from Cabometyx as a monotherapy for kidney cancer. However, the biotech should have more opportunities for growth.
One of those opportunities is in treating advanced hepatocellular carcinoma (HCC), the most common type of liver cancer. Exelixis hopes to win FDA approval for Cabometyx in the new indication by Jan. 14, 2019. If the drug wins approval (as I expect it will), Cabometyx should be well on its way to achieving blockbuster status within the next few years.
There are also plenty of opportunities for Cabometyx as a part of combination therapies. Studies are underway exploring the potential for Cabometyx with Bristol-Myers Squibb's Opdivo, as well as with Roche's Tecentriq, in treating kidney cancer.
I look for Exelixis to take the "rinse-and-repeat" approach that current big biotechs did in years past. The company should channel the nice cash flow that it's generating from Cabometyx into building out its pipeline even more.
All three of these biotechs face significant risks. As the only company with no product on the market yet, Editas is the riskiest of the group. However, there could also be pipeline setbacks and competitive challenges for both Ligand and Exelixis.
Still, I don't think these biotechs face monster-sized risks. Over the long run, Editas, Ligand, and Exelixis should be big winners.