Since the quarter is wrapping up and investors are considering their game plan heading into year-end, let's look at biotech's biggest winners for the year, why they've rallied, and whether they make sense for your portfolio. Specifically, let's consider five noteworthy biotech companies with jaw-dropping returns in 2014.
Intercept Pharmaceuticals (NASDAQ:ICPT), Achillion Pharmaceuticals (NASDAQ:ACHN), PTC Therapeutics (NASDAQ:PTCT), Puma Biotechnology (NASDAQ:PBYI), and Receptos (NASDAQ:RCPT) all have market caps greater than $1 billion, and each stock has returned more than 150% year to date.
1. Intercept Pharmaceuticals
Intercept's shares have soared this year thanks to a slate of good news surrounding obeticholic acid, or OCA. OCA targets a range of liver diseases, but investors really began paying attention in January when independent monitors halted its phase 2b trial in patients with nonalcoholic steatohepatitis, or NASH, an increasingly common cause of liver failure, early because it had already met its endpoint.
An increasingly fat- and sugar-rich diet in developed and developing countries has led analysts to estimate that NASH might displace hepatitis C as the leading cause for liver transplants. That has investors increasingly thinking that OCA's opportunity could mirror that of Gilead Sciences' hepatitis C drug Sovaldi.
Sovaldi's sales totaled more than $5 billion in the first six months of 2014; despite its high price, patients continue to embrace the drug because it reduces the likelihood of far more expensive liver transplants. If Intercept can post similar results for OCA in phase 3 testing, it could similarly end up with a blockbuster drug. However, given that the company doesn't have any revenue and already boasts a market cap north of $5 billion, its shares are risky.
2. Achillion Pharmaceuticals
Achillion stock has returned 240% this year, but most of that jump came in June when Merck agreed to pay up for Idenix, an Achillion competitor working on hepatitis C treatments.
Merck's willingness to fork over 3.4 times Idenix's prior closing price to capture its pipeline has some investors thinking Achillion could be Big Pharma's next target given that it is one of the only remaining hepatitis C pure plays.
Achillion's ACH-3102 has FDA fast-track status and is being studied as an adjunct therapy to Gilead's Sovaldi in a bid to shorten treatment periods from 12 weeks to as little as six weeks. Since the next hepatitis C battle will likely be over treatment duration, a buyer could certainly come knocking. After all, Achillion is arguably still not that expensive with a market cap just barely north of $1 billion. But such a deal is far from a sure thing.
3. PTC Therapeutics
Treatments for Duchenne muscular dystrophy, or DMD, have received a lot of attention over the past year as regulators struggle to reconcile spotty efficacy against an absence of treatment options. In May, European Union regulators reversed earlier objections to PTC Therapeutics' DMD drug, Translarna, in part because of patient outcry, sending shares higher.
The therapy got the official EU go-ahead in August, and Translarna could prove to be an intriguing drug with a long runway, particularly if competitors such as Sarepta, which is developing eteplirsen, stumble. However, the market opportunity for Translarna remains uncertain. The drug targets nonsense mutations found in just 10% of the 70,000 DMD patients in the U.S. and EU. Having said that, with an EU launch underway, investors will soon have much more clarity into demand for Translarna.
4. Puma Biotechnology
Puma's 295% share price jump this summer reminds investors that biotechnology stocks are volatile, and that short-selling them is risky.
Puma was one of 2013's best performers, but shares fell 50% earlier this year over concerns that its development-stage cancer drug neratinib would be derailed by worries over side effects. However, concerns that cases of moderate to severe diarrhea would imperil neratinib appear overblown following phase 3 trial results showing that HER2-positive breast cancer patients taking the drug saw a 33% improvement in disease-free survival versus the control group.
Those results have Puma planning to file for approval for netatinib with the FDA early next year and have raised speculation that a suitor might appear. That speculation might not be misplaced given that Puma founder Alan Auerbach was behind the blockbuster prostate cancer drug Zytiga, which he developed at Cougar Biotech prior to selling the company to Johnson & Johnson for $1 billion in 2009. Whether a suitor is willing to pay up for Puma is a good question given that the company's market cap is already near $8 billion.
Developing new multiple scleroris drugs turned Biogen Idec into a biotechnology Goliath, and investors hope Receptos will have similar fortune with RPC1063. In trials, RPC1063 reduced MS relapses by as much as 53% and reduced lesions by 86%, which is similar to results for Biogen's recently launched blockbuster MS drug Tecfidera.
Receptos is studying RPC1063 head-to-head against Biogen's multibillion MS blockbuster Avonex; if those phase 3 trial results are solid, it could join Novartis in offering a drug that outperformed Avonex directly during trials.
That advantage has been a marketing boon for Novartis' Gilenya, which posted sales of $1.9 billion last year. However, since RPC1063 remains in clinical trials and the company doesn't yet have any revenue, Receptos is probably best suited for the most risk-tolerant investor.
Todd Campbell owns shares of Gilead Sciences. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool recommends Gilead Sciences. The Motley Fool owns shares of Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.