Not too big, but not too small: The statement is reminiscent of the story about Goldilocks and the three bears, but it's also a pretty good description of mid-cap stocks in the biotech space. In this Motley Fool Live video recorded on July 14, 2021, Motley Fool contributors Keith Speights and Brian Orelli discuss five mid-cap healthcare stocks you'll want on your radar for the second half of this year.
Keith Speights: Brian, we talked last week about large-cap stocks for investors to watch in the second half of this year. Are there any mid-cap healthcare stocks that you think investors might want to have on their watch list for the second half of 2021?
Brian Orelli: I think mid caps are really in the sweet spot for biotech, so for setting $2 billion is the low-end of mid caps. That really says that investors see some potential. You don't get up to a valuation of $2 billion in biotech unless investors think that there's definitely potential in the company, so you've weeded out all the companies, the small caps that in theory could provide a lot more growth, but they're also usually a lot more risky and a lot more likely to fail. At least that's what investors are saying by valuing them at that level.
So if you're above the $2 billion level, I think that's really saying that investors see some potential in you. Then under $10 billion, if we're going to set that as the mid caps or that range varies a little bit, but let's say it's $2 billion to $10 billion for our sake. If it's under $10 billion, that still has plenty of room for additional growth.
A couple that I own, Ionis Pharmaceuticals (NASDAQ:IONS), this is a platform company. They're developing antisense drugs for a wide range of targets. It's had some setbacks but I think that's more due to the individual drugs, not to the pipeline, and the platform allows for development of drugs fairly quickly, and so I still like the company and still have quite a large position for me.
I have a basket of by-specific antibody companies. So these are antibodies that combined to two different targets. You can either bind to the same drug in two different spots and that will potentially give you more inhibition than binding in just one spot, or you can bind to two different targets. So for instance, you might bind to a tumorous cell with one of the antibodies and you might bind to an immune cell with the other antibody, and then therefore, bringing the immune cell close to the tumor cell and get the immune cell to attack the tumor cell.
A couple that I own is Xencor (NASDAQ:XNCR), the ticker there is XNCR. IGM Biosciences (NASDAQ:IGMS), ticker there is IGMS, and Zymeworks (NYSE:ZYME), ticker there is ZYME. Zymeworks is a little under our $2 billion market cap cutoff, but it's close enough that I figure we should mention it.
And then one that I don't own is Editas Medicines (NASDAQ:EDIT). This one has become the struggler in the three company race in the CRISPR space. But they do have phase I-2 data for the treatment of an eye disease called Leber Congenital Amaurosis Type 10, and that data is supposed to be presented at a conference at the end of September, so that's something I'll be looking forward to in the second half of the year.
Speights: Of the stocks you mentioned, Brian, I own only one of those and it is Editas. I bought it several years ago, and I'll confess, actually, it was a pre-clinical stage biotech stock when I bought it. It's the closest thing to gambling I've done in a long time.
I don't know if Editas will ultimately be successful, but I was intrigued by its approach, I was intrigued by its technology, I liked its intellectual property rights. It was a Motley Fool recommendation at the time, and I did take out a position in it knowing that I was pretty much making a bet there.
It has paid off for me quite well. Even with the volatility of the stock, I've actually done quite well with that investment. But I'm quite leery of buying early clinical-stage biotechs and certainly pre-clinical stage biotechs, but Editas was an exception for me.
Orelli: I think if you're going to buy the companies that are in that early stage, you just have to adjust the amount that you are buying, the position size so that you're not risking it all. Whatever your normal position size would be, maybe buy half of that or even a quarter of that, and then if it works, you're going to end up with full position size fairly quickly down the line. If it doesn't work, then you didn't risk that much on the stock.