The shine has come off biotech stocks. For example, the exchange-traded fund SPDR S&P Biotech ETF (XBI 1.86%) is down more than 20% so far in 2022, and more than 41% over the past 12 months. Biotech stocks still hold plenty of attraction, though, because the right ones can make investors wealthy.
There are plenty of reasons for the current slump in biotech. Rising interest rates make borrowing more expensive, and many biotech companies need ready financing to expand. Their growth potential is there, but only if they can make it to the finish line with marketable drugs.
Intercept Pharmaceutical (ICPT) and Exelixis (EXEL -1.00%) have a lot in common. Both stocks have seen their shares drop over the past 12 months, but each biotech company has a franchise drug that's already producing solid revenue numbers.
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A focus on liver disease is paying off for Intercept
Intercept Pharmaceuticals has seen its shares drop more than 7% year to date, and more than 49% over the past 12 months. That has more to do with general market trends than the company's financial health, which has been improving.
Intercept focuses on therapies to treat chronic, nonviral liver diseases. These include primary biliary cholangitis (PBC), an autoimmune disease of the liver, and nonalcoholic steatohepatitis (NASH), a buildup of fat in the liver that can cause it to swell and become scarred. There are no approved drug therapies to treat NASH yet.
According to a report by Allied Market Research, the global liver-treatment industry generated $20.67 billion in 2020 and is expected to grow at a compound annual growth rate of 5.7%, becoming a $36.45 billion business by 2030.
Intercept has one approved therapy, Ocaliva (obeticholic acid). It's used to treat PBC in combination with ursodeoxycholic acid (UDCA) in adults who have responded well to UDCA, or alone in adults who have not tolerated UDCA. Intercept currently has the drug enrolled in phase 3 trials to treat liver fibrosis and compensated cirrhosis due to NASH. It is expecting to release results this quarter from the latter study.
For the third quarter of 2021 (fourth-quarter results have not yet been released), the company reported that Ocaliva brought in $92.8 million in revenue, up 17% year over year. Through the first nine months of 2021, the company reported revenue of $271 million, up 15.3% over the same period in 2020. The company's guidance said it expected $355 million to $370 million in revenue for full-year 2021, up from $312.69 million in 2020.
Exelixis just came through a strong quarter
Exelixis stock has been down more than 15% over the last 12 months, but so far in 2022, it's up more than 8%. The company, which focuses on therapies for difficult-to-treat cancers, just reported Q4 2021 earnings that were a pleasant surprise. While analysts had expected earnings per share (EPS) of $0.07, the company reported EPS for the quarter of $0.29, up from $0.09 per share in the same period in 2020. Revenue was $451.14 million, up 67% year over year; annual revenue was $1.43 billion, up 45.3% over 2020 -- and it was the seventh consecutive year the company posted higher annual revenue numbers. For the full year, the company reported EPS of $0.72, up from $0.35 in 2020.
Exelixis has more marketed drugs and a larger pipeline than Intercept, but is still pretty reliant on chemotherapy drug Cabometyx for the bulk of its revenue; the therapy brought in $295.1 million in the quarter, or 53% of the company's quarterly revenue.
Cabometyx blocks the actions of certain protein kinases. So far, in connection with other drugs, it has been approved to treat kidney cancer and liver cancer; as a monotherapy, it's approved to treat late-stage thyroid cancer that has already been treated with therapies targeted at vascular endothelial growth factor receptor (VEGFR).
The company is also looking at Cabometyx in several other late-stage trials. Earlier this month, along with Bristol Myers Squibb (BMY 0.66%), it reported sustained survival rates in a phase 3 trial to treat advanced renal cell carcinoma, the most common form of kidney cancer in adults, with a combination of Cabometyx and Bristol Myers Squibb's Opdivo.
The primary molecule in Cabometyx, cabozantinib, is also the key to one of the company's other therapies, Cometriq, used to treat metastatic medullary thyroid cancer. The company's third marketed therapy, Cotellic, is a brand name for cobimetinib; it's marketed as part of a collaboration deal with Genentech, a subsidiary of Roche Holding, to treat melanoma that's unresectable (can't be removed surgically) or metastatic (when cells from a primary tumor get loose and cause another type of cancer in the body).
The road map is well marked
Both biotech companies appear to be on their way to being profitable and should see strong revenue growth in the coming years. This makes them good long-term buys -- with the caveat that most biotech stocks present a level of risk.
Of the two, I like Exelixis a little better, mainly because it has more marketed therapies and a deeper pipeline. Exelixis also has had more quarterly revenue growth over the past three years, climbing 109% compared to 78% for Intercept.
One plus for Intercept, though, is that it's better priced, with a price-to-sales ratio of 1.4, compared to 4.4 for Exelixis. On the other hand, because it has a smaller number of therapies, it's the riskier of the two stocks in the long term -- though looking at its reduced share price, it can be argued some of that risk is already priced in.
