The stock market has been on fire since the start of 2012. Biotech companies, though, have posted particularly impressive gains, markedly outperforming the broader markets during this time period. The iShares Nasdaq Biotechnology Index (NASDAQ:IBB), for instance, has more than doubled the performance of all the major U.S. indices over the last two years:
With 2015 shaping up to be another banner year for the industry, I think investors would be wise to have at least a few biotechs on their watchlist. Gilead Sciences (NASDAQ:GILD), Orexigen Therapeutics (NASDAQ:OREX), and Prothena Corporation plc (NASDAQ:PRTA) are three companies in particular with huge upside potential next year, making them good watchlist candidates. Here's why.
Gilead looks undervalued
Gilead Sciences grabbed headlines this year with the record-breaking sale of its hepatitis C drug Sovaldi and the commercial launch of its once-daily formulation of Sovaldi plus ledipasvir called Harvoni. In 2014, these two drugs alone are expected to haul in $11 to $12 billion in sales, helping the company to more than double its 2013 revenue. Looking ahead, Gilead's HCV franchise should generate around $10 billion per year, on average, for the next decade.
Aside from its new HCV products, Gilead is also seeing strong growth in its core HIV business, mostly due to the four-in-one combo drug Stribild. Stribild sales, for example, grew by 128% to $328 million in the third-quarter, compared to the same period a year ago.
Despite this stock's 44% gain year-to-date, Gilead is still trading at a highly compressed forward price-to-earnings ratio at 10.7 -- less than half the sector average.
What's apparently been holding this stock back is fear over a price war with AbbVie and its newly approved HCV therapy Viekira Pak. Now that Viekira Pak's 12-week course of treatment price of $83,319 has been announced isn't exactly a huge discount compared to Harvoni's $94,500 price tag, I think greed will start to trump fear in the coming weeks.
While Gilead's HCV and HIV franchises provide ample reasons to invest in this top biotech, I believe the company's foray into the oncology space with its blood-cancer drug Zydelig and its experimental monoclonal antibody Simtuzumab -- indicated for several diseases with staggering commercial potential -- are being downright ignored by the market. In short, we could see Gilead finally command a rich premium in 2015 due to its dominant positions in HCV and HIV, as well as its under-appreciated clinical pipeline.
Orexigen launches new diet pill
Orexigen and its marketing partner Takeda are attempting to finally open up the massive weight loss market that their competitors, Arena Pharmaceuticals and VIVUS, have so far failed to capture with their respective diet pills.
Despite tens of millions of severely obese potential patients within the U.S., Arena and VIVUS' FDA approved weight loss drugs, Belviq and Qsymia, will probably generate only about $100 million in combined sales this year.
Orexigen's pill, Contrave, has two advantages over its competitors that are already paying dividends in terms of capturing market share. First, Contrave is the only FDA approved obesity drug with a large amount of data on cardiovascular outcomes. Interim analysis from the so-called "Light Study", which is onoing and won't report final results until 2017, was good enough for the FDA to approve the drug and European regulators to recommend approval. Neither Belviq nor Qsymia appear to be on track to gain approval in Europe anytime soon, largely due to outstanding questions regarding their cardiovascular safety profiles.
The second advantage Contrave has is that Takeda has put a huge amount of marketing muscle behind its commercial launch, with a reported 900 sales reps dedicated to the U.S. market. This effort dwarfs the marketing power behind either Belviq or Qsymia.
Contrave should gain European approval by the second-quarter of 2015, and Orexigen looks poised to take the lion's share of the obesity market going forward, making it a stock to keep an eye on next year.
Prothena is a tiny biotech with big plans
If you've heard of Prothena before, you are definitely in the minority. This small-cap biotech, though, probably won't remain under the radar in 2015.
Prothena is an Irish biopharma with a potent pipeline aimed at treating diseases such as Alzheimers, Parkinsons, and Amyloid Light-chain amyloidosis (AL amyloidosis).
What makes this company a watchlist candidate for 2015, to me, is its ongoing late-stage trial for NEOD001, indicated for AL amyloidosis with cardiac involvement.
Following an impressive early stage study, management decided to accelerate the drug's development by pushing it straight into a late-stage, randomized, double-blind trial aimed at gaining global regulatory approvals. The FDA also granted NEOD001 the coveted "Fast Track Status" earlier this month, meaning that a regulatory review could begin, in part, before this pivotal trial is even completed.
With an interim analysis likely before the end of 2015 and a market cap currently at a fraction of NEOD001's projected peak sales, Prothena is certainly worth a deeper look by risk-tolerant investors.
Are any of these stocks buys right now?
I think Gilead is a great name to own, and is definitely less risky than either Orexigen or Prothena. That's why I've continually bought this stock over the last few years. Orexigen and Prothena, by contrast, are worth watching for the reasons outlined above. But I won't pull the trigger on these stocks until they appear to be solidly on track toward becoming long-term winners.
George Budwell owns shares of AbbVie and Gilead Sciences. 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.