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Don't Waste Your Money on Penny Stocks, These 2 Stocks Are Better Buys

By Maxx Chatsko - Apr 17, 2020 at 7:16AM

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These healthcare stocks are risky, but they offer investors much better wealth-building potential than penny stocks.

The uncertainty that has gripped stock markets around the world makes at least one thing clear: This is no time to buy penny stocks. There never was a good time, really. Most companies that trade as penny stocks are outright scams, with many having no actual operations at all. More importantly, owning those types of assets is no way to build wealth over the long haul.

That doesn't mean you have to shun high-risk, high-reward stocks. Assuming your portfolio is well structured for your financial situation, there's nothing wrong with examining a riskier asset or two (even in the midst of a global pandemic). Here's why investors might want to take a closer look at Coherus BioSciences (CHRS 17.27%) and Precision BioSciences (DTIL 7.84%)

A pair of hands grabbing a pile of $100 bills.

Image source: Getty Images.

A winning strategy in biosimilars

To be fair, Coherus BioSciences isn't all that risky. The company is focused on developing biosimilars, which are copycat versions of biologic drugs. They're not technically generic drugs; that term is reserved for small-molecule drugs in which the chemistry of the active pharmaceutical ingredient can be exactly recreated. It's simply too difficult to create exact copies of complex proteins, antibodies, and other biologic drugs. 

For that reason, the Food and Drug Administration requires clinical trials of biosimilar candidates and strict manufacturing oversight as conditions of granting marketing approval. While that erects barriers to entry, biosimilars still represent a solid market opportunity. 

Coherus BioSciences provides a great example of success. The company earned FDA approval for Udenyca, a biosimilar of Neulasta, in November 2018. Both drugs are used to boost white blood cell counts in chemotherapy patients. The biosimilar was launched in January 2019 and racked up $356 million in full-year 2019 revenue. The quick start helped the business generate full-year 2019 operating income of $107 million, which represented an encouraging turnaround from a cumulative operating loss of $771 million total over the previous four years. 

Udenyca's success can be attributed to the drug actually having a brand name (uncommon among generic drugs, but something that creates familiarity with doctors), the fact that Coherus had robust manufacturing capabilities in place, and a relatively smooth uptake among major insurers. 

Coherus is hoping to recreate that success with other pipeline assets. The company is developing biosimilars for both Lucentis and Eylea, each of which is used to treat wet age-related macular degeneration (wet AMD), as well as a biosimilar to AbbVie's blockbuster Humira for treating autoimmune disorders. It will take years for the biosimilar candidates to hit the market and ramp up sales, but Udenyca has significantly de-risked the development of the pipeline. 

The commercial-stage company recently estimated it generated at least $115 million in product revenue and at least $33.5 million in net income during the first quarter of 2020. Coherus BioSciences said it's reasonable to expect the coronavirus pandemic to have a negative effect on operations beginning in the second quarter of this year, but added that its manufacturing assets and supply chain are based in the United States, which insulates it from potential supply disruptions. 

Investors should also consider that Coherus BioSciences began 2020 with $177 million in cash and added another $200 million from a debt offering in mid-April. In other words, the business is well positioned to endure a prolonged period of uncertainty, which makes this pharma stock worth a closer look. 

Someone evaluating notes on a clipboard with a laptop and stethoscope present.

Image source: Getty Images.

A novel gene-editing platform

Precision BioSciences wields an early-stage drug pipeline with limited clinical data supporting it, but its intriguing potential might still attract investors. The company is developing a novel gene-editing platform that has inherent advantages over CRISPR gene editing. Among them is the fact that the business owns all of the underlying intellectual property, which allows it to pursue any and all disease indications, industrial applications, and agricultural markets. 

Most of the company's current market valuation is tied to its healthcare portfolio. Precision BioSciences has leveraged its gene-editing platform to engineer cell therapies taking aim at cancer. Its lead drug candidate, PBCAR0191, has generated initial data in a handful of patients with non-Hodgkin's lymphoma (NHL) and B-cell acute lymphoblastic leukemia (B-ALL). Early results showed promise, although it's too early to draw conclusions. 

What's important is that the development-stage biopharma shouldn't become too dependent on any single pipeline asset. The company has received the green light from the FDA to advance its next two oncology assets into clinical trials. Precision BioSciences also counts five discovery and pre-clinical programs outside of oncology, led by one for chronic hepatitis B for which it's partnered with Gilead Sciences.

Beyond healthcare, Precision BioSciences is exploring agricultural applications for its gene-editing platform through its wholly owned subsidiary, Elo Life Systems. The early-stage pipeline includes a partnership with Cargill to make canola oil with very low saturated fat and an intriguing program to engineer high-protein chickpeas. If the latter is successful, it could create a new supply of plant-based proteins for the likes of Beyond Meat.

Aside from the usual risks of investing in an early-stage biopharma, investors today must navigate the unique risks presented by the coronavirus pandemic. Orders to stay home have disrupted many aspects of daily life, including the ability to safely and efficiently conduct clinical trials.

Despite the industrywide uncertainty, Precision BioSciences initiated a study for its second drug candidate, PBCAR20A, in early April. Whether the company can plow ahead with its pipeline in light of the pandemic remains to be seen, but the gene-editing pioneer offers interesting possibilities to investors with a long-term mindset. 

Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Coherus BioSciences, Inc. Stock Quote
Coherus BioSciences, Inc.
CHRS
$12.97 (17.27%) $1.91
Precision BioSciences, Inc. Stock Quote
Precision BioSciences, Inc.
DTIL
$1.65 (7.84%) $0.12
Gilead Sciences, Inc. Stock Quote
Gilead Sciences, Inc.
GILD
$63.14 (1.84%) $1.14
AbbVie Inc. Stock Quote
AbbVie Inc.
ABBV
$140.94 (0.49%) $0.69
Beyond Meat Stock Quote
Beyond Meat
BYND
$36.94 (-0.30%) $0.11

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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