Investing in biotechnology companies is something of a feast-or-famine proposition. Companies in the industry are heavily dependent on research that may look promising in the lab, but that take years of expensive testing to prove out prior to approval. Success with those tests could bring fortune for those who invested before the product got big, while failure could bring ruin.
With that in mind, we asked three Motley Fool contributors to weigh the risks vs. potential rewards and each pick a biotech stock worth your consideration for a potential purchase this August. They picked Ligand Pharmaceuticals (NASDAQ:LGND), IQVIA Holdings (NYSE:IQV), and Aimmune Therapeutics (NASDAQ:AIMT). Read on to find out why and to help yourself make a more informed decision on whether any of them deserve a spot in your portfolio.
A cash-rich biotech royalty stock is the way to go
Sean Williams (Ligand Pharmaceuticals): Despite being one of short-side firm Citron's targets earlier this year, and vastly underperforming the broader market in 2019, I'd opine that royalty and contract biotech company Ligand Pharmaceuticals is the company you should consider buying in August.
The year-over-year comparisons on Ligand don't look pretty, but there is a viable reason for that. You see, in March, Ligand sold its global royalty property rights to Promacta, the company's biggest revenue-generating product, to Royalty Pharma. In return, Ligand wound up receiving $827 million in cash, which doubled the company's cash and cash equivalents.
Since Ligand is a company focused on early-stage drug development, then licensing or partnering its owned assets, this cash gives the company a long runway to execute on its business plan. As of the end of the second quarter, Ligand had about $1.39 billion in cash, cash equivalents, and marketable securities, which represents almost 80% of its current market cap. This large cash component would suggest that current investors have reasonably low downside risk.
Ligand also runs on the idea of "more shots on goal." Essentially, this means that Ligand aims to partner its intellectual property with as many biotech and pharmaceutical companies as possible. If these products make it to market, then Ligand receives a royalty, much of which goes straight to its bottom line. Thus, the more companies Ligand partners with, the more opportunities there are for future revenue generation. Ligand's four core technologies -- OmniAb, Captisol, LTP Technology, and VDP -- are involved in more than 150 programs, combined.
Even with the loss of its primary sales generator via its divestment, Ligand remains significantly profitable, and should continue to see margin expansion as new partnered drugs make it to market in the years to come.
A low-risk biotech bet
Brian Feroldi (IQVIA Holdings): The drug development process is fraught with risk. There are numerous roadblocks between discovering a new molecule and getting it on pharmacy shelves and the vast majority of drugs will end up in the dustbin. To make matters worse, there's no guarantee that healthcare providers will use a drug that makes its way to market. This is a big reason why most investors stay away from biotech investors altogether.
Thankfully, there is a way to profit from the biotech boom without assuming a lot of risk. Buying shares of a contract research organization like IQVIA Holdings is one way to do so.
Life sciences companies hire IQVIA to help them navigate the regulatory approval process. IQVIA employs an army of experts that handle every aspect of the process, including trial design, recruitment, data collection and analysis, and more.
Companies of all sizes choose to hire IQVIA because they are the largest player in the industry and they have decades of drug development experience. What's more, IQVIA can also help with the commercialization process if a drug crosses the finish line.
The beauty of this business model is that IQVIA makes money no matter what happens in the clinic. What's more, since the drug development process takes years to complete IQVIA has a lot of revenue visibility. Last quarter, the company's backlog of research and development projects expanded to $18 billion.
IQVIA also has a history of using its predictable profits to buy back copious amounts of stocks. When combined with margin enhancements, market watchers expect profits to grow by more than 14% annually over the next five years. That's quite fast for a dependable business that is trading for just 21 times next year's earnings estimates.
Buy this stock before a successful FDA outcome
Chuck Saletta (Aimmune Therapeutics): According to the American Journal of Managed Care, peanut allergies are the most common food allergies in children, with around 2.5% of children suffering from them. Aimmune Therapeutics' lead candidate to treat peanut allergies is AR101. The compound is about five weeks away from a key Food and Drug Administration advisory meeting on its future, and approval may not be too far behind, assuming a successful outcome from the advisory panel.
Indeed, the company has indicated that it is preparing for a national launch of AR101 during the fourth quarter of this year, assuming it receives that FDA approval. With no real current revenue to speak of, Aimmune Therapeutics is heavily dependent on receiving FDA approval to sustain its operations. The company currently has a market capitalization of around $1.3 billion, of which around $250 million is cash and short term investments, giving it a bit of breathing room if the FDA defers its decision.
AR101 is the biggest bet for Aimmune Therapeutics. The other treatments in its pipeline (for egg and walnut allergies) haven't even started phase 1 trials yet, making now a particularly pivotal time for the business. From an investor's perspective, buying before the FDA's decision will likely give the best outcome if its decision is a positive one, but its shares have room to fall if the FDA rejects the treatment.
That makes this August about the best time for investors who are bullish on AR101 to consider buying Aimmune Therapeutics' stock. A successful outcome at the FDA will likely push the company's shares above their recent price of $21.56. That said, because of the uncertainty involved in a pre-revenue company so heavily dependent on the decision of the FDA, investors should limit their position size to what they're comfortable losing. While the potential reward may be strong, the risk remains significant.