While there aren't any shortcuts to experiencing excellent returns on investment, the axiom "good things come to those who wait" isn't necessarily true when investing in biotech stocks. Specifically, there are no guarantees that positive early results will lead to positive later-stage clinical trials results, despite yearslong efforts put in to develop these drugs and therapies. More often than not, pharma and biotech investors can only gauge the chances of a company's success by weighing the results of its clinical trials against its available cash runway.
However, if that doesn't scare you off, and you're willing to take the risk and wait patiently, there's a pair of biotech stocks you should know, because of their massive potential to commercialize much-needed therapies and make shareholders richer. Let's dive in and see what makes them worth considering.
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1. Compass Pathways
Currently a pre-revenue biotech, Compass Pathways (CMPS -2.96%) is loaded with potential with what seems to be a killer product. Or more accurately, a potentially life-saving product. Its COMP360 therapy is designed to help people who have treatment-resistant depression (TRD). This company could be a great investment over the next five years because COMP360 could be an effective solution for a condition that's -- by definition -- resistant to existing methods of treatment.
COMP360 isn't like other antidepressants; it isn't just one therapeutic molecule that patients take as a pill. Instead, COMP360 is a process of administering psilocybin to patients, then having trained therapists talk with them in a controlled setting to support the beneficial biological effects of the molecule. Currently there are no other treatments with that combination on the market in the U.S., and there are no other psychedelics that are approved on their own for any purpose. And if the glowing results of the phase 2 clinical trial are any indication, COMP360 could lead to a sharp reduction in depression symptoms that lasts at least three months from dosing -- something that no other therapy for TRD can claim.
So Compass's opportunity with COMP360 could be massive, especially considering that there are roughly 100 million people worldwide who suffer from TRD. What's more, the program is currently recruiting new patients for phase 3 clinical trials, which could be concluded by the beginning of fall 2024. Favorable results in that trial could enable the company to commercialize COMP360 sometime in 2025, but shareholders would likely see major returns in advance of that.
But as a clinical-stage biotech, Compass Pathways isn't the right stock for everyone. It'll need to navigate risks like potentially running out of money, faltering in clinical trials, and not getting regulators to agree that its product is safe and effective. At the end of the fourth quarter of 2022, Compass had $143.2 million in the bank, and it only plans to spend up to $110 million in 2023, so the odds are good that it'll be able to reach the phase 3 trial's endpoint with the money it has on hand.
Of course, regulators could still give COMP360 the thumbs-down, which would devastate the company's share price. Therefore, if you're looking for a safe stock, look elsewhere. But if you're looking for a risky but potentially extremely rewarding investment to hold for five years, now's the time to buy.
2. Zai Lab
Zai Lab (ZLAB 0.51%) is another biopharma company with huge potential, but it's much further along its journey than Compass Pathways: It already has four oncology therapies on the market in China and Taiwan. While it isn't yet profitable, it expects to break even on its commercial operations in 2023 and become fully profitable before the end of 2025; management claims that its cash holdings of $1 billion will be sufficient through that period.
In the last three years, Zai Lab launched all four of its current oncology treatments, and in the next two or three years, it anticipates the launch of as many as 11 other programs, all in Chinese-speaking countries.
For a maturing biopharma business of its size, with a market cap of $4 billion and total revenue of $215 million in 2022, that pace of launching new therapies is utterly unheard-of. And it means the company's top line is going to take off soon, even if regulators in China stop it from advancing several of its commercialization attempts, which isn't likely. Wall Street analysts expect on average that in 2023, Zai Lab's revenue will grow to $344.2 million. And once its pipeline programs start hitting the market, that total will only grow.
The main risk for investors is that the timeline for reaching profitability might be a bit optimistic, which would require raising more capital to keep pumping candidates out the door. But given that Zai Labs has a scant $20.8 million in debt, taking out a few loans at an attractive interest rate won't likely be an issue.
Another major risk is that its stock price will take a hit if its clinical trials or commercialization attempts fail. But with so many chances to succeed in the near term, it's hard to see how any damage would be anything other than temporary.
