Despite the political headwinds emanating from the drug pricing debate in the United States, biotech stocks have been on an absolute roll during the first quarter of 2019. The core reason is that the industry has been churning out innovative new products at a blistering pace lately -- fueled in no small part by the Food and Drug Administration's (FDA) rather permissive stance under former commissioner Scott Gottlieb toward novel drugs .
Given this positive momentum across the industry, we asked three of our Motley Fool contributors which biotech stocks they think are worth buying right now. They picked TG Therapeutics (NASDAQ:TGTX), Cara Therapeutics (NASDAQ:CARA), and Innoviva (NASDAQ:INVA). Here's why.
A top momentum play
George Budwell (TG Therapeutics): Shares of the pre-revenue biotech TG Therapeutics have more than doubled in value since the start of the year, thanks to a string of positive clinical updates for its blood cancer duo of umbralisib and ublituximab.
First up, a mid-stage trial evaluating umbralisib monotherapy for marginal zone lymphoma reportedly achieved its primary endpoint of overall response rate for all treated patients. The company, in turn, hopes to turn this mid-stage success into an accelerated approval in the U.S. by next year. TG is also slated to release more top-line data from this ongoing mid-stage later this year that could lead to rapid regulatory approvals for patients with follicular lymphoma and small lymphocytic lymphoma.
The big prize, however, is the upcoming late-stage readout for the combination of umbralisib and ublituximab (or U2 for short) in patients with chronic lymphocytic leukemia (CLL). TG's goal is to demonstrate that U2 produces a superior progression-free survival rate in CLL patients, compared to those receiving a cocktail of obinutuzumab plus chlorambucil. This next major clinical catalyst should come into play by no later than mid-2020.
What does this all mean? The key item is that TG seems poised to become a commercial-stage biotech within the next 12 to 16 months and that simple fact should keep the company's stock headed in the right direction. Now, a clinical setback is always a concern with these types of companies, but TG's blood cancer pipeline has been producing some truly impressive results of late. As a result, TG's stock arguably sports a rather intriguing risk-to-reward ratio right now.
Scratching an itch
Keith Speights (Cara Therapeutics): Patients with chronic kidney disease (CKD) frequently experience a very irritating side effect -- itching (also known as pruritis). The problem is that there's not much that can be done about it. There aren't any FDA-approved treatments for CKD-associated pruritis (CKD-aP) -- yet.
Cara Therapeutics hopes to change the situation. The biotech's lead candidate, Korsuva, is currently in a phase 3 clinical study for treating moderate-to-severe pruritis in patients with CKD who are on dialysis. Cara expects to announce the results from this study later in 2019.
It's quite possible that Korsuva could generate annual sales of well over $500 million in the U.S. alone in treating CKD-aP in patients who are on hemodialysis. But Cara doesn't plan on limiting sales to the U.S. In fact, the company has already lined up a big partner, Vifor Fresenius Medical Care Renal Pharma, to market Korsuva outside of the U.S., Japan, and South Korea.
Cara is also targeting even bigger opportunities. It's evaluating an oral version of Korsuva in treating patients with CKD-aP who aren't on dialysis. And the biotech has begun an early-stage study focusing on the treatment of patients with chronic liver disease-associated pruritis (CLD-aP).
The company's market cap currently stands at around $776 million. Good news for Korsuva should send Cara's shares into orbit. While there's a risk that the drug won't be successful, I think Cara looks like a great pick for aggressive investors to buy.
Biotech stocks don't get much cheaper than this
Sean Williams (Innoviva): Although it's not common to find traditional value stocks (e.g., single-digit forward price-to-earnings ratio) in the biotechnology industry, that's exactly what you get with Innoviva.
While it might qualify as a traditional value stock, Innoviva isn't your typical drug company. Rather, it's a royalty company that has benefited from its work with GlaxoSmithKline (NYSE:GSK) in developing long-acting, inhalable next-generation medicines to treat chronic obstructive pulmonary disease (COPD) and asthma. The drugs GlaxoSmithKline and Innoviva introduced include Breo Ellipta, Anoro Ellipta, and the more recently launched Trelegy Ellipta.
In recent months, Innoviva's share price has been slammed following the FDA's long-awaited approval of a generic version of blockbuster COPD and asthma inhaler Advair. With Advair generics on pharmacy shelves, there's clear concern among investors that higher-priced brand-name drug sales could suffer, which could adversely impact Innoviva's royalty stream from GlaxoSmithKline.
But this shortsighted worry is likely overlooking the progress that GSK and Innoviva have made over the years in educating physicians about these next-generation therapies and in gaining adequate insurer coverage. In other words, yours truly would expect generic pressure to be relatively minimal on established brands like Breo and Anoro.
Additionally, it's worth pointing out that the real strength of late for GSK's and Innoviva's next-generation drug line has been in overseas markets where this generic Advair ruling won't have any impact. While Breo sales were nearly flat in the U.S. in 2018, they grew 24% on a constant currency basis in Europe, and 31% in other international markets. Modestly stronger growth was also seen with Anoro in overseas markets.
Lastly, consider that, as a royalty company, Innoviva has minimal corporate expenditures. Operating expenses for the entire year totaled $22.8 million, with just $14.3 million in general and administrative recurring costs. This means most of the royalty revenue Innoviva is generating is going straight to its bottom line and to reducing its outstanding debt. Last year, its senior secured loans were reduced from $237.1 million owed to just $13.5 million.
Long story short, at less than eight times forward earnings, Innoviva looks ripe for the picking.