Biotech stocks can be highly risky. But they can also offer the potential for massive returns in a relatively short time. In this Motley Fool Live video recorded on Sept. 8, 2021, Motley Fool contributors Keith Speights and Brian Orelli talk about two biotech stocks to buy right now that offer attractive risk-reward propositions.
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Keith Speights: Brian, I'm going to pitch you a softball here. This is the softball, no hardballs to close out the segment. A lot of investors think of biotech stocks as highly risky. Many of them are, of course.
But Brian, if you had to pick the one biotech stock that you think offers the best risk-reward proposition for investors to buy right now, which stock would it be?
Brian Orelli: Can I give you two? [laughs]
Speights: Sure. Hey, it's a softball.
Orelli: Let me give you more softball.
Speights: Yeah. Hit it twice.
Orelli: Because these are the last two biotechs that I purchased, and I purchased them on the same day last week. Reata Pharmaceuticals (RETA -6.04%), it was one of them. Ticker there is RETA. This is definitely a valuation play. The market cap is $4 billion. It's trading well off its 52-week high.
The company has one drug that can treat multiple different types of kidney diseases. It's under FDA review for one type of kidney disease called Alport syndrome, and then it's been tested in five other indications. Then it also has a drug for Friedreich's ataxia, which is a fairly rare disease, and it plans to file for that drug in the first quarter of next year. It could go from zero drugs to two drugs fairly quickly, and the market cap of $4 billion seems completely reasonable there.
At the other end of the spectrum, Twist Biosciences (TWST -7.88%), the company synthesizes DNA for researchers. It has a market cap of $5.6 billion, so slightly larger than Reata, but trailing-12-month sales are only $126 million. If it's a drug company, we'd really question that valuation. The price-to-sales ratio is 42.5, but the allure of Twist, and the reason why I like it for the long term, is that they can synthesize DNA very cheaply compared to all of its competitors.
That can accomplish quite a few different things. One thing they're doing is, the company is creating antibody libraries. They synthesize the DNA, and then from the DNA, they make the antibodies. Potential upside, it's a little hard to value the potential, but it sounds like they're going to create the antibodies and then out-license the drugs. It has potential to make quite a large pipeline. Whether that pipeline will turn into actual revenue down the line is certainly more risky proposition.
Then the real long-term potential is to use DNA to actually record data. DNA is four different base pairs. Just like data -- it's a zero or a one -- you got 1, 2, 3, or 4 now, and you can use it to, theoretically, do long-term storage of data that you don't need to access all the time, but you need to have a long-term record of it.
This is definitely a David Gardner Rule Breaker-type investment. It's a moonshot, but I like the prospects for Twist Biosciences.
Speights: You heard it from Brian: Reata and Twist. So keep your eyes on those two stocks.