Clinical-trial results, regulatory decisions, and fierce competition make investing in biotech stocks tricky, but that doesn't mean that investors ought to ignore the industry. The potential to profit from the development of revolutionary new treatments can make buying biotech stocks worthwhile.
If you can withstand the risks, it could be a great time to buy Cambrex (NYSE:CBM), Ligand Pharmaceuticals (NASDAQ:LGND), and Celgene Corp. (NASDAQ:CELG). Here's why Cambrex could be a bargain, how Ligand Pharmaceuticals is leveraging its intellectual property to create a royalty stream, and why news in December could spark a rally in Celgene's shares.
Same great company, much better price
Chuck Saletta (Cambrex): Back in August, I argued that Cambrex was worth considering because it was well positioned to thrive as other companies took on the risks of biotech research. Operationally speaking, the company is still as well positioned today as it was a few months ago, but the market has graciously offered potential investors a much better price on its shares.
Back when that original piece was published, Cambrex's shares fetched $62.90 apiece. After the market's recent pullback, those same shares could be purchased for $52.97. That's a better than 15% drop, and it makes the company a compelling opportunity for valuation-oriented investors. At this price, it trades at less than 18 times its anticipated forward earnings, and those earnings are still expected to grow at around 15% annualized over the next five years.
Cambrex's key business model is to provide custom manufacturing and generic active pharmaceutical ingredients to other biotech companies. In the heavily regulated world of healthcare compounds, the costs of compliance in order to manufacture are huge. Biotech companies founded on their research and development prospects are often more than happy to farm out the operational and manufacturing complexity to Cambrex. That gives Cambrex the opportunity to thrive virtually no matter who else does.
Such a picks-and-shovels–type model means that Cambrex likely won't be an incredibly fast grower, but it does mean the company has a high probability of overall success. Combine that success with a decent valuation at a much better price tag than a few short months ago, and you have a biotech company that looks worthy of consideration for buying shares today.
A better biotech business model
Brian Feroldi (Ligand Pharmaceuticals): Most biotech stocks offer investors boom-or-bust potential. If everything goes well, the gains can be extraordinary. However, the odds of success are long, so it can be hard to put money to work in the space.
Ligand Pharmaceuticals takes a differentiated approach to biotech that makes it highly appealing. The company developed a custom drug-development platform that is designed to help other drugs work better. Ligand licenses its technology out to dozens upon dozens of other pharma companies -- including heavyweights like Amgen and Novartis -- and it collects hefty royalty payment on any sales.
This business model allows the company to consistently churn out profits and maintain a fat pipeline. Right now, the company has more than 165 partnered programs in various stages of development, which is a number that most other biotechs would kill for.
The company's recent results prove that this business model is working. Revenue soared by 221% last quarter to $90 million. Adjusted profits more than tripled. While these numbers will wax and wane in any given period based on milestone payments, the undeniable trend is up and to the right.
Looking ahead, the next big catalyst for investors is the potential FDA approval of Sage Therapeutics' postpartum depression drug brexanolone. If all goes well, Ligand will add yet another high-margin revenue stream to its financial statements before the end of the year.
If all of the above wasn't exciting enough, Ligand is also currently trading 37% below its recent high because of the market sell-off. That's providing forward-thinking investors with a great chance to get in.
Lots of news approaching
Todd Campbell (Celgene): Every year, biopharma companies present their latest research on blood cancers at the American Society of Hematology conference in December. It's anyone's guess what companies will emerge winners from the meeting, but I think Celgene has a good chance of impressing, and if so, now could be a great time to buy shares.
The company is presenting data on a slate of its drugs, including next-generation cancer-killing therapies called chimeric antigen receptor T-cell (CAR-T) therapies and therapies for beta thalassemia and myelodysplastic syndromes (MDS).
The CAR-T data will be particularly important to watch. Competitors have already won FDA approval of CAR-Ts for use in some patients with late-line B-cell cancers, but these early-generation therapies can cause life-threatening side effects. If Celgene's JCAR17 is as effective and safer, it could reshape the use of these therapies.
Celgene also plans to update investors on CAR-Ts for multiple myeloma it's developing with bluebird bio (NASDAQ: BLUE). The two have already reported good data from early-stage trials of bb2121, but this will be the first look at early-stage trial data for bb21217, its second-generation CAR-T for multiple myeloma. Celgene also plans to report data from an early-stage study of JCARH125, a CAR-T for multiple myeloma it acquired when it bought Juno Therapeutics in January.
Investors will also get detailed insight into luspatercept, a beta thalassemia and MDS drug that Celgene is collaborating on with Acceleron Pharma (NASDAQ: XLRN). Earlier this year, luspatercept met its primary endpoint in late-stage studies, and plans are to file it for approval early next year.
If the multiple myeloma data is good, it could provide Celgene with a successor to its best-selling drug, Revlimid, which starts to face off against generics in 2022. The approval of luspatercept could be needle-moving too, because Celgene pegs its peak sales opportunity at $2 billion.
Overall, a flurry of data at the ASH conference could spark investor interest in Celgene, making now a good time to add it to portfolios.
Brian Feroldi owns shares of Celgene. Chuck Saletta has no position in any of the stocks mentioned. Todd Campbell owns shares of Amgen, Bluebird Bio, and Celgene. His clients may have positions in the companies mentioned.
The Motley Fool owns shares of and recommends Bluebird Bio and Celgene. The Motley Fool recommends Amgen. The Motley Fool has a disclosure policy.