It's hard to beat the world of biotech investing when it comes to sheer excitement. Biotechs announce major news almost on a daily basis, whether it's clinical updates, deals, or financial reports. But while some investors might like the excitement, every investor likes a shot at making a solid return.
We asked three Motley Fool contributors to pick the biotech stocks that they think provide great prospects of generating those solid returns that investors crave. Here's why they chose Celgene (NASDAQ:CELG), Exelixis (NASDAQ:EXEL), and Xencor (NASDAQ:XNCR) as top biotech stocks to buy right now.
A win-win proposition
Keith Speights (Celgene): How would you like an opportunity to rack up a gain of more than 20% within the next few months? It's quite possible by buying Celgene. All that needs to happen is for the proposed acquisition of Celgene by Bristol-Myers Squibb (NYSE:BMY) to close.
Granted, the odds that the deal will be scuttled have increased. Three BMS shareholders -- two of them with significant stakes -- have announced their opposition to the acquisition. But there still appears to be a pretty good chance that shareholders of both BMS and Celgene will approve the transaction and that the deal will close sometime by the third quarter of this year.
Even if the deal falls apart, Celgene is likely to be tremendously successful over the long run. I'd even argue that BMS needs Celgene more than Celgene needs BMS.
It's true that blood cancer drug Revlimid generates the lion's share of Celgene's total revenue right now and the drug's patents are being challenged. However, I think Celgene will fend off generic rivals for several more years. The biotech has a couple of other fast-growing drugs. More importantly, its pipeline is chock-full of potential blockbusters that could launch within the next two or three years.
There's essentially no risk with buying Celgene at its current price if the BMS acquisition goes through. While the biotech certainly faces some risks on its own, I'd put Celgene's odds of success over the long term higher than many biotech stocks on the market. I think investors have a win-win proposition with Celgene no matter what happens.
Riding the "Cabo" wave
The obvious reason Exelixis is worth a look is its star drug, Cabometyx. In second-line renal cell carcinoma (RCC), Cabometyx hit the trifecta of a statistically significant improvement in objective response rates, progression-free survival, and overall survival. It also beat Bristol-Myers Squibb's Opdivo, the most popular second-line RCC therapy, to achieve approval as a first-line RCC treatment thanks to strong clinical data in the Cabosun trial.
Long story short, sales of Cabometyx soared to $619 million in 2018, representing an increase of 77% from the previous year. Although sales growth in Cabometyx tied to RCC will slow a bit in the quarters that lie ahead, pricing power and modest demand increases still bode well in the indication.
Beyond RCC, Exelixis received the green light from the Food and Drug Administration (FDA) in mid-January to expand Cabometyx's label to include second-line advanced hepatocellular carcinoma (HCC). The market for HCC, inclusive of competition, should be in the same ballpark as RCC, meaning Cabometyx might have the potential to be a $1.5 billion-a-year drug.
Another exciting aspect is that Exelixis' research engine has been reignited. The company notes that it's submitted an investigational new drug application with the FDA for an internally developed compound, XL092, a small-molecule tyrosine kinase inhibitor that'll target VEGF receptors and other kinases for certain types of cancer. While it's unclear what the future may hold for this soon-to-be phase 1 dose-finding study, it's just good to see Exelixis researching new compounds. Plus, with $851 million in cash and investments, acquiring new compounds isn't out of the question.
There are also a handful of partnered studies that show promise. Exelixis is working with Bristol-Myers and Roche on a pair of late-stage studies. Exelixis is testing Cabometyx in combination with Bristol's Opdivo in the CheckMate 9ER study for patients with previously untreated RCC, and recently initiated the Cosmic-312 study in combination with Roche's Tecentriq for patients with previously untreated advanced HCC. In other words, a bigger share of the HCC pie may still await.
All told, Exelixis is valued at roughly four times Wall Street's projected 2022 sales figures, and has a forward price-to-earnings ratio of 17, all while being on track to nearly double revenue between 2018 and 2022. In all respects, it still looks undervalued relative to its full potential.
A rare find
Brian Feroldi (Xencor): I'm wary of most small and midsize biotechs. These companies usually have bet their entire futures on the success of a single molecule. Since the odds are so heavily stacked against them, I'm normally content to focus my attention elsewhere. However, I'm willing to make an exception for Xencor.
Xencor is a $2 billion biotech that has developed a technology that allows it to make small tweaks to drugs to make them work better. The company boasts 12 molecules in development that target diseases like blood cancers, asthma, and more. Some of its drugs are wholly owned while others are in development with big-name partners such as Novartis, Amgen, and Alexion Pharmaceuticals. By aligning itself with a number of deep-pocketed pharma companies, Xencor has been able to raise capital in a non-dilutive way and bring credibility to its technology.
Xencor and Alexion recently crossed the finish line with a drug called Ultomiris that treats an incredibly rare disease called paroxysmal nocturnal hemoglobinuria. Ultomiris is essentially an enhanced version of Alexion's incredibly successful drug Soliris. Alexion used Xencor's technology to make Ultomiris longer acting and more effective that Soliris is on its own, which should go a long way to validate Xencor's technology.
It will take some time for the rest of Xencor's pipeline to mature, but the company can afford to be patient. Xencor had more than $548 million in cash as of the end of September, which is enough to fund operations until 2023 on its own.
With a cash-heavy balance sheet, a big pipeline of opportunity, and a proven technology on hand, Xencor stands out as a small-cap biotech that is worth betting on.