Biotech stocks are some of the most exciting investments on Wall Street. When one company develops a successful treatment for a complex condition, shares can surge overnight and attract buyout interest from Big Pharma.
But when a drug trial fails, it can go down in flames. Case in point: Biotech giant Biogen BIIB, -4.48% imploded roughly 30% on Thursday after announcing it is canceling its Alzheimer’s drug efforts after poor drug trials. It fell again on Friday.
For those skittish of that kind of lurch, there are a few ETFs to diversify your investment and smooth out some of the bumps. The $8.2 billion iShares Nasdaq Biotechnology ETF IBB, -3.39% and the $4.4 billion SPDR S&P Biotech ETF XBI, -4.42% are the two most popular. However, the iShares ETFis up only about 4% in the last 12 months and the SPDR ETF is up only 2% while the broader S&P 500 SPX, -1.90% has a return of 8% in the same period — so diversification is not exactly a recipe for success.
The bottom line is you have to pick your spots based on either high-potential drug trials or the likelihood of an acquisition.
It’s a risky business, to be sure. But if you’re interested in rolling the dice in biotech, here are five stocks worth researching:
Sage Therapeutics
For some investors, the success story of Sage Therapeutics SAGE, -0.80% is old news. Shares have skyrocketed more than 60% year-to-date thanks to approval for a postpartum depression treatment.
However, in many ways, the story of Sage is only in the early chapters. Shares are actually down modestly from their early 2018 peak of more than $180, hit around the time the company announced positive results for an insomnia drug trial.
That’s in part because even after this postpartum drug success, analysts have reservations about a slow rollout and the fact that Sage is going it alone, without a Big Pharma heavyweight by its side. That means fewer resources for marketing and distribution, and of course the risk of competition.
But Sage is a first-mover here, and it has plenty of other drugs in the pipeline to prove its not a one-trick pony. These include not just sleep treatments but also a depression treatment that analysts project could generate $2 billion in sales by 2026.
All biotech stocks are risky. But there’s a lot to like about this one — and its recent approval should inspire confidence.
Celgene
Many investors already know Celgene CELG, -1.65% a $63 billion biotech giant that is no longer a small, development-stage drugmaker but instead a major player projected to book $17 billion in revenue this year.
Unlike Sage, however, the bloom is off the Celgene rose. Shares are only up by low single-digits over this time in 2018, and are down more than 25% from their 2017 highs after weak earnings and guidance late that year created questions about its product pipeline that have lingered like a black cloud.
But one other thing has also lingered in recent months — the chance of a buyout from Bristol-Myers Squibb BMY, -1.55% after a $74 billion bid in January.
The previous deal was for one share of Bristol-Myers Squibb stock plus $50 in cash for each share of Celgene. There is still uncertainty over what final terms this time might be, or whether management and shareholders will ultimately go for the deal at all. But an important recommendation from proxy advisers as early as this week is likely to set a clear course for the deal.
There’s a chance this could still all fall apart. But the hard reality is that Bristol-Myers Squibb announced some tough news from the FDA in October on some of its drugs and could really use Celgene products to broaden its portfolio, and the nature of Big Pharma is to only get bigger. Bristol-Myers Squibb may not have a choice but to close this deal — and if it doesn’t, I still like Celgene as one of the heavyweights of biotech for the long run.
Exelixis
Midsize biotech Exelixis EXEL, -4.37% has the impressive returns you want to see in a fast-moving momentum stock, with shares up more than 400% since the start of 2016.
However, a look at the chart shows a period of consolidation across 2018 as investors lost interest — followed by what looks like the beginning of a new wave higher that began in late 2018 and has continued this year.
That’s because Exelixis’ flagship cancer drug, Cabometyx, received FDA approval in January for additional use cases. This on the heels of almost $620 million in revenue from Cabometyx in 2018, up more than 70% from 2017, is a great sign.
Adding to optimism are comments from CEO Michael Morrissey on an earnings call in February that highlighted plans for acquisitions, licensing deals and other efforts to add new products to the mix to pad the company’s pipeline
Shares have momentum in 2019, up more than 20% year-to-date, but remain below their all-time high reached in January 2018. Given recent successes, there’s every reason to expect Exelixis can get back to where it was around $30 a share — 25% upside from here — and perhaps power higher if headlines stay positive.
Crispr Therapeutics
One of the first big names among gene-editing stocks Crispr Therapeutics CRSP, -6.00% has been a part of the sometimes controversial discussion about this next-gen medical technology for years now. Born out of the Broad Institute, a genomics partnership between MIT and Harvard, Crispr has a lot of the appeal that biotech investors are looking for, given its ambitious treatment plans using cutting-edge technology.
The first-mover advantages Crispr has over late entrants to gene editing are noteworthy. The company already has a potential cure for sickle cell disease, and in October the FDA removed its clinical hold on the therapy. Then in January, Crispr announced the treatment received fast-track status that allows more frequent and timely review of trial data to help with bringing the product to market sooner rather than later.
That fast-track designation was announced in partnership with $47 billion biotech player Vertex Pharmaceuticals VRTX, -0.56% — a strong sign of possible acquisition interest if things go well.
Elsewhere in the pipeline are gene therapies for rare cancers, blood disorders and other conditions. It’s an exciting time for this subset of biotech, and Crispr clearly is one of the top names to watch -- particularly after its 30% return so far in 2019.
Puma Biotechnology
Puma Biotechnology PBYI, -3.37% is an interesting investment to consider. Instead of suffering a sharp decline after a failed trial, Puma stock has suffered despite FDA approval thanks to what investors see as a failure to roll out its new drug fast enough or with enough fanfare.
Puma exploded higher in 2015 thanks to positive results for a breast cancer treatment, soaring to an all-time high of roughly $270 a share. But sales didn’t materialize as dramatically as some had hoped. When revenue growth dried up, as reported in November, the stock plunged more than 30% in a single session.
It’s now worth taking another look at the stock. Projections for FY2019 include revenue growth of about 18%, with another 24% in FY2020 as marketing and sales finally get up to full speed.
Furthermore, Puma has a long history with Big Pharma, including early drug trials conducted with Pfizer PFE, -1.18% in 2010 that established good relationships — and increase the likelihood that some larger player may see Puma as a bargain with a proven drug it can plug into its existing distribution.
This is not a company that failed to develop a cure, just a company that failed to live up to initial hype. The fact that shares have bounced back an impressive 90% so far in 2019 from recent lows is a sign that the initial selloff may have been too hasty.
Jeff Reeves writes about investing for MarketWatch. He has no holdings in any securities mentioned in this column.
