When it comes to risk and reward, perhaps no sector offers more ups and downs than biotechnology.
Lately, the pendulum has been swinging healthily toward the reward side, with the SPDR S&P Biotech ETF handily (and I do mean handily) outpacing the return of the S&P 500 over the past three years. A number of notable biotech therapeutic advancements, as well as cheap access to cash and venture capital -- remember, low lending rates have helped spur business expansion and investments -- have been pivotal in helping biotech stocks of all sizes and therapeutic fields move higher. Not to mention, a growing U.S. economy helps investors feel more confident in purchasing riskier, but higher-growth investments like biotech stocks.
But, biotech stocks also carry with them inherent risks that can make them dangerous long-term holds. Just the thought of holding onto a biotech for five, 10, or even 20 years without selling would cause many investors serious indigestion.
The primary risks of holding biotech stocks long term
Innovator drugs, known better as branded drugs, only have a finite 20-year period of patent exclusivity. This period of exclusivity doesn't start when a drug reaches pharmacy shelves, either. It begins when a biotech company gets the OK from the Food and Drug Administration to begin human clinical trials, which could take up to 10 years or even longer.
There's also the constant fear of cash burn. Biotechs with immature or developing pipelines can certainly offer huge payday possibilities, but clinical-stage companies are also likely to burn through a ton of cash. One of the more common ways companies of this nature raise cash is through common stock offerings, which dilute investors.
On the flipside, even the most established of biotechs have to be concerned with competition and portfolio diversity. On top of all this, the odds just aren't in drugmakers' favor. According to PhRMA, for every 5,000 to 10,000 compounds that enter the research and development pipeline, just one will be approved by the FDA. Further, the cost to develop a single drug these days (including all the failures) is roughly $800 million to $1 billion, meaning there's no guarantee biotech companies will ever net shareholders a positive return, even with one or a small handful of approved products.
One biotech stands out for the long term
But, what if I told you there was a biotech stock geared to fend off nearly all of these concerns, and that you could buy and hold, in my belief, for the next 20 years?
The concern with Biogen is that it's far too focused on multiple sclerosis. Developing Tecfidera and researching other MS products will likely land the company significant MS market share for years to come. However, Biogen isn't the only company with its eye on helping MS patients. Two decades is a long time, and I think there's a good chance a few competing therapies will emerge to challenge Tecfidera or subsequent MS therapies developed by Biogen.
In the case of Gilead Sciences, I have two concerns. First, I worry about growing hepatitis C competition and the potential emergence of a therapy that works in a shorter time frame than Sovaldi or Harvoni, Gilead's dynamic duo. Also, I'd note that Sovaldi and Harvoni essentially provide a "cure" for 90% or more of HCV sufferers. This means a good chunk of Gilead's revenue could begin to dry up as fewer cases of HCV are discovered. Don't get me wrong, that's great news for HCV sufferers. But from an investment standpoint, it could make holding Gilead for 20 years a bit risky.
There are even more reasons to choose Celgene over these others, though.
For starters, Celgene has an established product portfolio. There are no worries of cash burn because it has a very profitable hematology product in Revlimid, as well as cancer drug Abraxane and anti-inflammatory compound Otezla. Since the end of 2008, Celgene has generated $10.2 billion in free cash flow, putting to rest any concerns about whether or not it has the cash flow to support additional research and development.
Secondly, Celgene offers a diverse portfolio geared at treating chronic conditions. Celgene is attacking conditions with unmet needs, such as multiple myeloma, lymphoma, and myelodysplastic syndromes, while also tackling solid tumors cancers and varying forms of inflammation and immunology. These are diseases currently without a cure that will likely necessitate a patient to take these therapies over the course of their lifetime.
Perhaps most importantly, Celgene has a clever way of extending the shelf life of its most valuable drugs. By testing Revlimid, Abraxane, and Otezla in new label indications, with the approval of the FDA, it can get the exclusivity for its key drugs further extended -- at least for a specific indication. With Revlimid expected to account for more than 60% of Celgene's sales in 2015, the eight additional labels it's being testing for could help boost sales by the end of this decade, but also stabilize sales next decade, when Revlimid's initial approvals begin to lose their exclusivity.
Lastly, Celgene is working with more than two dozen collaborative partners on a range of hematology, oncology, inflammation, and immunology drugs. These collaborations may cost Celgene a bit in upfront and milestone costs, but putting its financing behind some revolutionary new treatment pathways could net it substantial long-term rewards that can replace lost Revlimid sales next decade.
Celgene has been even more impressive in the fact that it's managed to largely grow organically. This isn't to say Celgene won't make any acquisitions going forward, but the company looks poised to double its sales and nearly triple its profits through 2020 based on organic growth and label expansion alone.
Based on this, as well as the above-mentioned factors, I'd suggest long-term investors seeking that "unicorn" biotech holding give Celgene some serious consideration.