There's no doubt that investing in development-stage drugmakers is risky. Just look at the falls that InterMune (Nasdaq: ITMN) and Medivation (Nasdaq: MDVN) took earlier this year after the drugs failed to get past the Food and Drug Administration and pass clinical trials, respectively.
One way to mitigate that risk is by buying multiple biotechs to deaden the blow from a drug getting delayed or dropped. As I discussed earlier, an exchange-traded fund doesn't work all that well, but a basket of well-researched biotechs can offer a good mix of risk and reward.
Another way is to invest in fewer development-stage drugmakers but pick ones with deep pipelines. The additional shots on goals should help buoy the share price should one drug get pulled from the pipeline.
Here are three drugmakers with solid pipelines worth keeping an eye on:
You can have it (back)
Exelixis (Nasdaq: EXEL) got some good and bad news all wrapped up in one when its partner, Bristol-Myers Squibb (NYSE: BMY) handed back the rights to its lead compound XL184 last month. Owning the drug completely and not having to share potential revenue is clearly a good thing, but only if the drug actually works. Bristol-Myers clearly doesn't value XL184 as much as it does other drugs in its own pipeline.
Fortunately, Exelixis has multiple opportunities beyond XL184. There's a phase 2 drug partnered with sanofi-aventis (NYSE: SNY) and nine other compounds that are in phase 1 trials, many of which are licensed out to other companies including Bristol-Myers, GlaxoSmithKline, and Roche. That should give investors some solace that big pharma thinks Exelixis can develop drugs.
Given its advanced stage, if XL184 doesn't work in medullary thyroid cancer, shares are sure to fall. But once the dust settles, Exelixis will be able to pick itself up and have one of its backup compounds ready to fill the void.
All antibodies, all the time
Seattle Genetics (Nasdaq: SGEN) has developed a suite of antibody-based drugs that attack specific proteins to slow down a disease. Like Exelixis, Seattle Genetics has one drug in each of the latter stages of development. There are also four drugs in phase 1 trials hopefully preparing to move forward.
Investors will know soon whether Seattle Genetics will need its backup compounds. The company expects to report data in late September or October for a trial testing its lead compound, brentuximab vedotin, in patients with Hodgkin's lymphoma that have failed other treatments.
If brentuximab vedotin doesn't pass, investors need not fret; the drug is also being tested in Hodgkin's lymphoma patients after a stem cell transplant, which may be easier to treat, and the drug is in trials for other types of lymphoma as well. For now, you can think of brentuximab vedotin as a backup drug for itself.
Pay up
Weighing in with a market cap of $2 billion, Regeneron Pharmaceuticals (Nasdaq: REGN) is the most expensive of the three. But it also has the most developed pipeline with three phase 3 drugs.
Arcalyst posted mixed results as a treatment for gout last month, but it still has two more clinical trials to redeem itself. Regeneron also has an antibody against vascular endothelial growth factor -- which promotes blood vessel growth -- that is being tested in both cancer, where it's called aflibercept, and eye diseases such as macular degeneration, where it's referred to as VEGF Trap-Eye.
Most importantly, if those drugs fail, Regeneron has drug discovery deals with Sanofi and Astellas, which should help keep the pipeline stocked whether the current drugs pass muster or not.
Which one?
It's a tough call. They all look fairly priced to me given their relative risk and potential reward.
Perhaps the best option is to buy all three. If a basket of biotechs is a good idea, then a basket of biotechs with multiple shots on goal could be even better.
