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Investing in the Best Biotech Stocks

Updated: April 22, 2021, 1:55 p.m.

Some scientists believe that we’re in the “golden age" of biotechnology. Scientific advances are creating new ways that previously were only imaginable to treat and prevent diseases. This is also presenting tremendous opportunities for investors since the long-term return potential of many biotech stocks is highly attractive.

Here’s what you need to know about investing in biotech stocks.

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The biotech industry is rapidly changing in the current economic climate. Find the latest information in the newsfeed at the end of this article.

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Best biotech stocks

The best biotech stocks to buy right now boast strong pipelines, and some already have winning drugs on the market. The COVID-19 pandemic has also created some tremendous opportunities for biotechs developing potential treatments and vaccines. Here are a few companies that investors should watch closely.

Company Primary focus
Axsome Therapeutics (NASDAQ:AXSM) Neuroscience
Exelixis (NASDAQ:EXEL) Cancer
Novavax (NASDAQ:NVAX) Infectious diseases
Regeneron Pharmaceuticals (NASDAQ:REGN) Autoimmune diseases, cancer, eye disease, infectious diseases
Vertex Pharmaceuticals (NASDAQ:VRTX) Rare diseases

Source: The Motley Fool

1. Axsome Therapeutics

Axsome's lead candidate drug, which it calls AXS-05, targets depression and Alzheimer’s disease-related agitation. In early 2021, the company formally filed for U.S. regulatory approval for the drug to treat depression. It’s also evaluating AXS-05 in a phase 2 study for smoking cessation. Axsome is developing an experimental migraine drug called AXS-07, for which it plans to seek U.S. Food and Drug Administration (FDA) approval during the second quarter of 2021. The biotech company has two other drug candidates in clinical trials at very early stages.

If approved, AXS-05 as a depression treatment could be a blockbuster drug, with peak annual sales -- the highest dollar-volume of sales per year analysts project -- estimated at $2.6 billion. The peak annual sales forecast for AXS-07 in the U.S. alone is more than $500 million per year. The revenue potential for these two drug candidates makes Axsome Therapeutics an attractive mid-cap stock to buy right now.

2. Exelixis

Exelixis has developed four drugs that are already on the market. Its biggest winner by far is Cabometyx. The drug is approved for treating renal cell carcinoma (RCC) and hepatocellular carcinoma (HCC), the most common types of kidney cancer and liver cancer, respectively.

This biotech company could deliver solid growth in the future by expanding the use of Cabometyx as part of combination therapies. Exelixis and Bristol Myers Squibb (NYSE:BMY) won U.S. approval in early 2021 for Cabometyx in combination with immunotherapy Opdivo, and Exelixis is also working with Roche (OTC:RHHBY) to evaluate a Cabometyx-Tecentriq combination treatment. Both of these treatment combinations are targeting previously untreated RCC.

Exelixis is using its fast-growing cash stockpile to enter into licensing agreements and otherwise expand its offerings. It is now licensing from Aurigene a promising early-stage cancer drug called XL102.

3. Novavax

Novavax could profit from a big winner with its COVID-19 vaccine candidate NVX-CoV2373. It’s one of the leading vaccine candidates using a protein subunit (a single protein molecule) to spur an immune response against the novel coronavirus. The biotech company in early 2021 reported positive interim results from a U.K. late-stage study of the experimental vaccine.

The U.S. government has signed a $1.6 billion agreement with Novavax to fund the late-stage development and manufacture of its COVID-19 vaccine, with the stipulation that Novavax supply 100 million doses if the drug is successful in clinical testing. Novavax has also inked supply deals with Australia, Canada, the U.K., and India.

In 2019, Novavax stock lost nearly 90% of its value when the company's respiratory syncytial virus vaccine candidate ResVax failed late-stage clinical trials for a second time. But the stock's price recovered in 2020, and the company has reported overwhelmingly positive results from a late-stage study of its experimental flu vaccine NanoFlu. The company now plans to pursue FDA approval of the flu vaccine. Analysts project that, if approved, NanoFlu could generate annual sales of as much as $1.7 billion.

4. Regeneron Pharmaceuticals

The biggest moneymaker for Regeneron Pharmaceuticals is Eylea, an eye disease drug it makes in collaboration with Bayer (OTC:BAYRY). All net sales from Eylea in the U.S. are awarded to Regeneron, and the company splits with Bayer the revenue earned from markets outside of the U.S.

Regeneron also has a lucrative partnership with Sanofi (NASDAQ:SNY), with which it is jointly developing autoimmune disease drugs Dupixent and Kevzara, cancer drugs Libtayo and Zaltrap, and the cholesterol drug Praluent.

Regeneron also won U.S. Emergency Use Authorization (EUA) for treating COVID-19 with its antibody cocktail REGEN-COV. With the company’s late-stage results showing that REGEN-COV can significantly reduce the risk of symptomatic infection by the novel coronavirus, the potential market for this therapy is likely growing.

The biotech company is poised for solid growth over the next few years since several of its drugs are likely to be approved for additional indications.

5. Vertex Pharmaceuticals

Vertex enjoys a near-total monopoly in treating the underlying cause of cystic fibrosis (CF), a rare genetic disease that results in the excessive buildup of mucus in the lungs and digestive system. Its newest drug, Trikafta/Kaftrio, could expand the addressable CF patient population by more than 50% by targeting a genetic mutation estimated to occur in 90% of CF patients.

The company’s pipeline includes other promising CF drugs in phase 2 testing. Plus, Vertex is seeking to expand beyond CF with phase 2 programs targeting pain and the rare genetic disease alpha-1 antitrypsin deficiency, which is characterized by shortness of breath, lung infections, and fatigue.

Vertex’s early-stage programs by themselves could be game changers. The company is partnering with CRISPR Therapeutics (NASDAQ:CRSP) to test gene-editing therapies (treatments that involve changing DNA sequences) targeting the rare blood diseases beta-thalassemia and sickle cell disease. The company has also advanced into phase 1/2 testing of an experimental drug that has the potential to cure type 1 diabetes, a disease that, in the U.S. alone, affects more than 1.5 million people. Although analysts haven’t projected peak annual sales for these pipeline drug candidates, Vertex could be well positioned to profit if all -- or even most -- goes well.

Woman scientist in lab holding up test tube.

Image source: Getty Images

Biotech basics

What exactly is a biotech? It’s a company that uses living organisms (for example, bacteria or enzymes) to make drugs. This use of living organisms differentiates biotechs from pharmaceutical companies, which use chemicals to develop drugs.

There are four major steps for biotechs in developing new drugs:

  1. Drug discovery, where biotechs identify drug candidates and the diseases that they could potentially target.
  2. Preclinical testing, where biotechs test drug candidates in vitro (in test tubes) and/or in vivo (in living animals, such as mice).
  3. Clinical testing, where biotechs test drug candidates in humans.
  4. Regulatory approval, where biotechs seek to obtain approval from applicable government agencies to sell a drug.

Clinical testing typically involves three phases:

  • Phase 1, which involves small studies designed to find a safe dose for the drug candidate and determine how it affects humans.
  • Phase 2, which involves studies that can include around 100 or more patients and focus on safety, short-term side effects, and determining the optimal dose for the drug.
  • Phase 3, which involves larger studies that can include hundreds or even thousands of patients and that focus on how effectively an experimental drug treats a target disease as well as how safe it is.

A drug candidate must successfully make it through each phase to advance to the next. Once a drug successfully completes a phase 3 trial by demonstrating safety and efficacy in treating the target condition, the biotech will file for regulatory approval using the clinical data from the study. In the U.S., the FDA oversees approvals for new drugs.

Investors should pay close attention to which phases a company’s drug candidates are in. The later the phase, the less risk there usually is. It’s also important to consider a drug candidate’s peak annual sales -- the highest level of sales per year that analysts project. The higher the better.

In addition, a biotech with more experimental drugs in its pipeline (the term used to refer to all a company’s drugs that are in development) will tend to have less risk than a biotech with only one or a very few drug candidates.

Another important thing to watch with biotechs is their financial positions. Most biotechs don’t achieve profitability until they successfully launch one or more drugs in the market. They require significant amounts of cash to fund operations and advance their pipeline candidates. Companies often issue new shares to raise the cash needed, which lowers the value of existing shares. Some biotechs also receive money through partnerships with larger drugmakers and grants from government agencies and nonprofit organizations.

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Risks and rewards of biotech stocks

Axsome, Exelixis, Novavax, Regeneron, and Vertex could all be successful with their clinical studies and win regulatory approval to sell their innovative treatments. It’s also possible that these biotechs’ clinical studies could flop or even fail spectacularly. And, even if testing goes well, there’s still no guarantee the companies' drugs will be approved by agencies such as the FDA.

Investors should pay close attention to which phases a company’s drug candidates are in. Drugs in later phases are more promising and less risky. It’s also important to consider a drug candidate’s peak annual sales. A biotech company with many drugs under development tends to be a safer investment than a biotech company with only a few experimental drugs.

Another important aspect of a biotech company is its current financial position. Most biotech companies don’t become profitable until they begin to successfully sell one or more drugs. Until that occurs, biotech companies require significant amounts of cash to fund their R&D operations and advance their drug candidates. Biotech companies are at risk of not having enough money to fund clinical studies and complete regulatory filings, and they may fail to bring any new drugs to market.

Companies often satisfy their cash needs by issuing new shares, which dilutes the value of the existing shares. Some biotechnology companies also receive -- and may be dependent on -- money obtained through partnerships with larger drugmakers or grants from government agencies and nonprofit organizations. Any of the most promising biotech companies could be acquired by the larger drugmakers.

Despite the risks, the chances appear good that these five biotech stocks will generate tremendous long-term gains for patient investors.

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