From Buzz to Business: Biotech
February 21, 2018, 11:43 am
It’s been an especially wild ride for biotech recently, but I’m glad to see that the industry that embodies so much sizzle is bouncing back fast. The iShares Nasdaq Biotechnology ETF (IBB) still has to move quite a bit to recover its pre-correction peak, but the rebound path could close the gap fast.
While these stocks have outperformed the broad market since the presidential election, they also suffered steeper losses in the 2015-2016 debate over the sky-high cost of drug prices. Unlike the major indices nudging records on a monthly basis, biotech has another 20% to rally before it even tests the historical limit. As such, many of the development-stage companies that capture truly disruptive growth are becoming attractive opportunities.
Alexion Pharmaceuticals (ALXN), GW Pharmaceuticals (GWPH), Denali Pharmaceuticals (DNLI) and Portola Pharmaceuticals (PTLA) are great examples of the types of companies I’m talking about. Let me explain why.
ALXN is tracking to double its cash flow by 2021, which really isn’t far away in the grand scheme of things. This one’s all about continuing to supplement a strong existing autoimmune franchise with next-generation products – drugs that address minuscule patient populations but make a huge difference to those suffering from one genetic disorder after another. While these programs won’t be blockbusters, they all draw on a few core technologies, which makes it easier to roll from target to target and build a significant market.
GWPH will launch a huge blockbuster drug in the next couple of months that would be huge for the stock if it’s a success. As Wall Street evaluates the revenue prospects, the clock is ticking toward that once-in-a-lifetime corporate event. Meanwhile, the pipeline keeps advancing on other targets, including an adult epilepsy program with strong potential. GWPH is a great demonstration of why biotech has such appeal among long-term investors. You’re literally watching these companies change lives, year by year and milestone by milestone, and the base is usually set close enough to zero that when the fundamental needle starts moving, it moves fast.
DNLI only went public in December so it’s still on the speculative side. I’d like it to get a little trading history behind it and wait for management to share more about the development pipeline. We’re looking at neurodegenerative disease here, which is an extremely challenging field to crack. If the company can survive the clinical process and convince the FDA that it can cure Alzheimer’s or Parkinson’s disease, DNLI’s upside could be huge. Otherwise, there’s a non-trivial risk that, like endless other ambitious researchers before it, the company will go bust.
PTLA has given up 30% from last summer’s peak after the FDA hit the brakes on approving a hotly-anticipated blood disease therapy upon discovering a high rate of side effects. Management is working around the roadblock and I suspect this could still become a billion-dollar drug under the right circumstances. However, those circumstances haven’t come together yet so it will remain on my watch list for now.
I’m keeping a close eye on my screens, but right now I think the best opportunities lie within ALXN and GWPH, which I recommended in my GameChangers service. I expect these stocks to move fast, and if you’re interested in seeing the level I suggest buying them under and how far I think they can fly, make sure to sign up for your risk-free trial of GameChangers before it’s too late.