The biotech industry could arguably be described as Wall Street’s roulette wheel. The odds of successfully bringing a new drug to market are low, which makes investing in biotech riskier than in most industries. However, for those drug developers that are able to overcome the odds, the rewards could be great, both for the developing company and for investors.
With this in mind, we picked the brains of three Motley Fool investors to gauge what biotech stock they believe investors should consider buying right now. Topping the list were mid-caps Intercept Pharmaceuticals (NASDAQ: ICPT) and Xencor (NASDAQ: XNCR), as well as biotech blue-chip Celgene (NASDAQ: CELG).
Is Wall Street overlooking the most promising NASH stock?
Sean Williams (Intercept Pharmaceuticals): There’s perhaps no hotter space within the biotech industry at the moment than treatment for nonalcoholic steatohepatitis, or NASH. NASH is a liver disease that, if untreated, can lead to fibrosis, liver cancer, and even death. It affects between 2% and 5% of all U.S. adults, is expected to be the leading cause of liver transplants by the middle of the next decade, and has no Food and Drug Administration-approved therapies. Translation: It’s a massive opportunity for drug developers and investors.
In recent weeks, a couple of under-the-radar players have wowed Wall Street. Less than three weeks ago, Madrigal Pharmaceuticals (NASDAQ: MDGL) reported top-line results from its 36-week phase 2 study involving MGL-3196 as a treatment for NASH. Overall, Madrigal’s liver biopsy results showed that 70% of patients with a more than 30% fat reduction at week 12 demonstrated a greater than two-point reduction in their NAFLD Activity Score by the 36th week. That was more than double the 32% of patients that demonstrated a similar response by taking the placebo.
The latest updates from Viking Therapeutics for VK2809 for NASH patients have also sent its stock into the stratosphere. Viking’s lead NASH drug hopeful works similarly to Madrigal’s, thus catapulting its share price.
But what Madrigal Pharmaceuticals and Viking Therapeutics lack, Intercept Pharmaceuticals can provide. Intercept’s Ocaliva is already an approved drug for the treatment of primary biliary cholangitis (PBC), and its phase 3 studies in NASH are due to read out in the first half of 2019. With few exceptions, Intercept’s NASH competition is somewhere in the range of 30 to 40 months from reasonably bringing a NASH drug to market (assuming success), by my best estimate. A first-to-market advantage in NASH would be nothing short of huge for Intercept and its bottom line.
The concerns surrounding Intercept’s lead drug are also overblown. For those who may not recall, Intercept stepped in a big pothole of sorts in September when it came to light that Ocaliva had led to PBC patient deaths. What was often overlooked, though, is that these patient deaths were due to patient or physician dosing errors, as well as the fact that many of these PBC patients were already very sick. In no previous NASH studies involving Ocaliva has there been anything out of the ordinary with regard to adverse events relative to the placebo, with the exception of pruritus, which is a scientific term for “itching.”
So, from what I can tell, Ocaliva ran circles around the placebo with regard to NASH resolution and led to a statistically significant reduction in NAFLD Activity Score in the phase 2b Flint trial, and it’s on track to potentially make it to market well ahead of its peers. In short, Wall Street is nuts if it overlooks Intercept.
Betting on a platform
Brian Feroldi (Xencor): Single-drug biotech companies might be exciting to own but their binary risk profile makes them extremely unpredictable. That’s why I prefer to get behind biotech companies that have already built out a broadly diversified pipeline. This provides investors with some downside protection while still allowing them to earn huge returns if one of their drugs turns out to be a massive winner.
One biotech company that I hold in high regard is Xencor. While the company is still relatively small — its market cap is just $2.3 billion — it has already built an impressively diversified pipeline. This includes five compounds that are wholly owned and another five that have already in development with its partners. What’s more, two of its partnered products are in phase 3 development and are nearing the finish line. This includes ALXN1210, which is being developed with biotech giant Alexion Pharmaceuticals, and MOR208, which is being developed with MorphoSys.
Xencor boasts such a big pipeline in spite of its small size because it has focused its attention on developing a drug development platform instead of just a single compound. Call the “XmAb engineering platform,” Xencor uses its technology to make small changes to the structure of antibodies in order to more drugs that are more potent and last longer than other methods. Pursuing this strategy allows the company to quickly churn out new compounds that target a wide range of diseases such as blood cancer, HIV, asthma, lupus, and more.
Turning to the financials, Xencor is in tip-top shape. The company recently raised $245 million in additional capital through a common stock offering. The deal was completed while shares were trading near an all-time high, so the shareholder dilution was minimal. The capital raise extended its runway through 2023, so shareholders can rest assured that another raise won’t be needed anytime soon.
In total, Xencor is a small biotech that is in wonderful financial shape and appears to have stumbled upon a winning formula for quickly churning out exciting new drugs. That’s a combination that any biotech investor should find highly appealing.
Often, the time to buy a great company is when it stumbles
Chuck Saletta (Celgene): Celgene is a huge player among biotech companies, with a market capitalization around $57 billion. Yet its shares are substantially down year to date and trade near levels not seen since 2014. A big part of the issue is that it has had a series of recent high-profile problems getting compounds through the FDA approval process, calling into question its ability to generate future revenue growth.
That’s a big deal in the biotech industry, as patent protections on pharmaceuticals don’t last forever, and once generics are approved, revenue on branded products tends to collapse. If Celgene doesn’t get its mojo back when it comes to getting new compounds through the FDA approval process, not only is its future growth in question, but so is its overall revenue stream.
The market is concerned about that very bleak potential future, and thus it has sent Celgene’s shares down to multiyear lows. It’s within that context, however, that Celgene looks like a potential candidate for investors to buy. It trades at an astoundingly low eight times anticipated forward earnings, and even with the longer-term risks to its revenue, its earnings are expected to grow at a decent pace over the next five years.
An investment in Celgene today is a calculated risk that it will soon get itself back on track with regards to the FDA and resume its ability to bring new medications to market. Assuming it succeeds, the market’s worries today will soon be forgotten, giving its shares plenty of opportunity to recover.
10 stocks we like better than Celgene
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now… and Celgene wasn’t one of them! That’s right — they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of June 4, 2018
Brian Feroldi owns shares of Celgene. Chuck Saletta has no position in any of the stocks mentioned. Sean Williams owns shares of Celgene and Intercept Pharmaceuticals. The Motley Fool owns shares of and recommends Celgene. The Motley Fool has a disclosure policy.