Every portfolio can benefit from a growth stock or two. Whether you're in your 20s or enjoying retirement, tapping into businesses that are growing much faster than the broader market can help to make your hard-earned money go even further. That doesn't mean you should go all-in on risky companies that promise (and often fail) to change the world or pretend that you're a venture capitalist with cash to burn on early-stage endeavors. But identifying even a handful of solid, fast-growing companies can make or break your portfolio's returns.

There's no shortage of companies or industries to investigate, but to kick off 2020, I think investors should focus on perennial heartbreaker Incyte (NASDAQ:INCY) and relative newcomer Axsome Therapeutics (NASDAQ:AXSM). Here's why these two pharma stocks are worth a closer look in January.

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Should opportunistic investors move in?

What are the chances that six late-stage drug candidates all fail registrational trials? If you've been an Incyte shareholder long enough, then you might be cynical enough to think that's a rhetorical question. Seriously, though, this pharma stock's recent tumble has been a little exaggerated. 

In the first few days of 2020, investors ran for the exits when Incyte announced disappointing results from a registrational study. A combination therapy comprising itacitinib, the company's drug candidate, and corticosteroids failed to meet the primary and secondary endpoints in a phase 3 study in graft-versus-host disease (GVHD). All patients in the study were treatment-naive, meaning they had not received prior treatment. 

The failure stung for two reasons. First, it immediately reminded investors of past high-profile clinical failures from Incyte and reset any optimism for upcoming data readouts from other parts of the late-stage pipeline. Second, analysts had expected the GVHD portfolio of Incyte to have peak annual sales potential of up to $925 million. 

Despite the disappointing results, the stock's tumble can certainly be called an overreaction. This time around really is different for Incyte for two reasons: a strong pipeline and comfortably profitable operations.

Consider that the company has five more drug candidates in various stages of development. That includes ruxolitinib in GVHD patients who don't respond to steroids, which delivered promising results in a phase 2 study in late 2019. There's also the oncology asset pemigatinib, which should earn approval in cholangiocarcinoma in 2020. That rare cancer represents a relatively small opportunity, but early results suggest that the small molecule inhibitor could be the best in its class for treating certain genetically defined cases of bladder cancer. That could be a multibillion-dollar opportunity. 

Incyte is also developing a cream containing ruxolitinib as a treatment for atopic dermatitis and vitiligo. Early results suggest that could be a winning indication, with Morningstar analyst Karen Andersen penciling in a 60% probability of generating $1 billion in annual revenue by its 10th year on the market -- assuming it earns regulatory approval after completing clinical trials. 

Investors shouldn't make excuses for Incyte -- it absolutely needs to earn Food and Drug Administration (FDA) marketing approval for one or two late-stage assets to justify its market valuation. But the business is also comfortably profitable. In the first nine months of 2019, it reported operating income of $307 million and operating cash flow of $579 million, marking year-over-year increases of 549% and 129%, respectively. The third-quarter surge in operating income should help to change the narrative that the stock is too expensive. It certainly changed my mind.   

Strong financial performance provides a great foundation from which to fund any potential market launches for new assets in the coming years. It should also help to lower the stock's valuation metrics, which could lower the anxiety levels of investors. Simply put, Incyte is making the most of its only drug product and has a promising batch of pipeline assets to pin its hopes on -- even if past and recent failures make some hardened investors a little cynical. 

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Image source: Getty Images.

Is this stock just getting started?

Shares of Axsome Therapeutics erupted for a 3,578% gain in 2019. The company emerged from obscurity with promising midstage results for AXS-05, a drug candidate being developed to treat depressive disorders. It earned Breakthrough Therapy designation from the FDA and later met all endpoints in a phase 3 trial. 

Given the unique mechanism of action and simple formulation of AXS-05 (a combination of a cough suppressant drug and a smoking cessation drug), it could compete well against selective serotonin re-uptake inhibitors (SSRIs) that dominate treatment today. With the large need for better depression treatments, the drug candidate is likely to top $1 billion in peak annual revenue. 

After all, analysts had previously expected a drug candidate from Sage Therapeutics to top $2 billion in peak annual sales as a non-SSRI treatment option for depressive disorders, but that experimental treatment failed its registrational study

That alone makes the $3.2 billion valuation of Axsome Therapeutics pretty attractive for investors with a long-term mindset, but there's more in the company's pipeline. Perhaps the next most-promising drug candidate is AXS-07, which is being developed as a treatment for migraine. In a recently concluded phase 3 trial, the drug candidate met both primary endpoints, which measured its ability to relieve pain symptoms compared with placebo. 

More important, AXS-07 met key secondary endpoints when tested head-to-head against rizatriptan, which is a standard migraine treatment. A recent survey of physicians who collectively treat 50,000 migraine patients found that 37% would prescribe AXS-07 if it bested placebo, but 90% would recommend the drug candidate if it proved superior to rizatriptan. 

Axsome Therapeutics expects to file new drug applications for AXS-05 and AXS-07 in the second half of 2020, which means approval and market launch milestones won't occur until 2021 or early 2022. Nonetheless, those two drug candidates alone could support a market valuation well above the current $3.2 billion level.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.