The potential to develop blockbuster next-generation drugs that reshape patient treatment makes biotechnology stocks one of the most exciting industries for investors. However, the risks of investing in biotech stocks are high. Most clinical trials evaluating drugs fail, and those disappointments often lead to big losses. While there are no guarantees for success, it can help to focus on companies with lots of financial firepower and drugs in late-stage studies or with proven mechanisms of action. It's for those reasons that Arena Pharmaceuticals (ARNA), Acceleron Pharma (XLRN), and bluebird bio (BLUE -0.66%) are my top stocks to buy in the industry right now.
A big deal boosts the outlook for this stock
Arena Pharmaceuticals just landed a blockbuster licensing deal with United Therapeutics (UTHR 1.17%) that pads its balance sheet and gives it financial wiggle room to advance additional drugs into late-stage, phase 3 studies.
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On Nov. 15, the two companies announced that United Therapeutics will pay Arena Therapeutics $800 million up front in cash, plus up to $400 million in milestones, and double-digit royalties on sales to license ralinepag. A treatment for pulmonary arterial hypertension (PAH), ralinepag hopes to win away meaningful share in a blockbuster indication by improving blood flow between the heart and lungs to reduce the risk of heart damage.
Arena Pharmaceuticals has been touting ralinepag as potentially a best-in-class medicine for PAH, and it couldn't find a better partner than United Therapeutics, the longtime leader in PAH treatment. United Therapeutics has a 20-year history in PAH treatment, and its medications for the indication accounted for most of its $412 million in third-quarter sales.
The licensing pact is a win for United Therapeutics because it helps the company play defense against what could've otherwise been a competitor, and it's really good news for Arena Pharmaceuticals because the up-front cash will bring its cash stock pile to more than $1.3 billion. That's a lot of money it can use to support other drugs in development, including etrasimod and olorinab.
An S1P inhibitor that's designed to be more selective than the S1P inhibitor Gilenya, a multibillion-dollar-per-year drug for multiple sclerosis, etrasimod has already successfully completed phase 2 trials in ulcerative colitis, and phase 3 trials could begin soon.
Olorinab is in development to treat Crohn's disease pain by interacting with cannabinoid receptor 2, a receptor that's best known for interacting with marijuana. A phase 2a trial of olorinab recently provided encouraging data, and additional studies are being planned.
On track for its first commercial-stage drug
Like Arena Pharmaceuticals, Acceleron Pharma has a collaboration partner with a lot of experience in the indications its drugs are targeting. Specifically, Acceleron Pharma's luspatercept is a beta-thalassemia and myelodysplastic syndrome drug that is licensed to the biotech Goliath Celgene (CELG).
Over the summer, Acceleron Pharma and Celgene reported positive phase 3 study results for luspatercept in both of those indications, prompting Celgene to announce plans to file for luspatercept's approval in both indications in the first half of 2019. If regulators agree that luspatercept deserves approval, it could quickly become a top seller, because it reduced the need for blood transfusions, which are common in these patients and can result in iron overload that can damage organs.
Celgene has a lot of experience in bone marrow disorders because it generates about $12 billion annually marketing drugs for multiple myeloma, a type of bone marrow cancer, as well as other blood disorders, including MDS. Recently, Celgene estimated that luspatercept's peak sales potential could exceed $2 billion annually.
If so, it would be great news for Acceleron Pharma. If all goes well, Celgene will pay it up to $185 million in future development, regulatory, and sales milestones -- and importantly, it will split any luspatercept profit with Celgene in North America and pocket low- to mid-20% royalties on sales elsewhere. It also shouldn't be ignored by investors that Celgene already owns more than 12% of Acceleron Pharma, raising the possibility of an outright acquisition in the future.
The potential for significant revenue should help extend the runway of its cash, which totaled $319.8 million, and help it fund trials for other drugs in development, including sotatercept, which is in phase 2 trials for PAH.
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Multiple shots on goal and a bulletproof balance sheet
One of the hottest things in biotech research is gene therapy, and last year, everyone was flocking to buy shares in companies working on chimeric antigen receptor T-cell therapies that can be used to fight back against B-cell cancers. Gilead Sciences (GILD -0.28%) acquired CAR-T developer Kite Pharma for $11.9 billion in August 2017, and Celgene spent about $9 billion acquiring the 90% of CAR-T company Juno Therapeutics it didn't already own earlier this year.
Lately, though, there's been less interest in companies working on CAR-T, in part because of slow-to-grow sales of the two CAR-T therapies already approved for use. Extrapolating the initial growing pains of this class of drug, however, to other gene therapy players, including Bluebird Bio, could be a mistake.
Like Kite Pharma and Juno Therapeutics, Bluebird Bio is a CAR-T pioneer, but unlike those companies, it has set its sights initially on using the approach to reshape multiple myeloma treatment. Its most advanced CAR-T for multiple myeloma is bb2121, which is licensed to Celgene, and results from mid-stage trials show a better-than-90% response rate in heavily pretreated patients. Trials that could secure an FDA approval are already ongoing, and if they're successful, bb2121 could be a big winner because of Celgene's dominance in that indication.
Coming up quickly behind bb2121 is Bluebird Bio and Celgene's bb21217, too. It's designed to elicit even better responses, and results from an early-stage study showed six of seven patients had a response. Additional data from that study will be presented at the high-profile American Society of Hematology (ASH) conference in December.
The opportunities ahead of Bluebird Bio aren't limited to multiple myeloma therapies, either. It has already filed for European approval of its beta thalassemia drug, LentiGlobin, and phase 3 trials for that therapy in sickle cell disease are planned to begin in 2019. The company also has a trial ongoing for another therapy, Lenti-D, in cerebral adrenoleukodystrophy that could enable an FDA filing.
The company also boasts one of the best balance sheets in clinical-stage biotech. It had $2 billion in cash and equivalents exiting September, and according to management, that should last it into 2022. It's also got two well-heeled biotech companies as investors. Celgene has a small (2%) stake in it, and in August, Regeneron acquired $100 million in Bluebird Bio shares as part of a new collaboration deal.
Overall, these are all high-risk companies without revenue-generating drugs on the market currently, but I think each has drugs in development that could be winners and, if I'm right, make them profit-friendly additions to growth stock portfolios.
