When it comes to investing biotech stocks, it's wise to focus on
companies that have completed much of their drug development work.
The closer a company gets to the finish line in the
clinical-testing process, the less chance that a drug will fail --
taking the company's stock down sharply.
That's also the logic used by big drug companies. They like to
acquire promising young drug developers, but only those that have
done much of the heavy lifting to vet a drug's prospects.
Anacquisition announcement sends stocks skyrocketing, so early
investors in those small biotech companies can make a lot of
For Instance, I'm a big fan of
I recently added
$100,000 Real-Money Portfolio
. But there are also a number of other biotech stocks that hold a
considerable amount of promise -- if you are willing to stomach the
risk. That's why a basket approach makes sense for this speculative
segment, as just one big gainer can make up for the other biotech
picks that don't gain traction. So it's wisest to own a mix of
biotechs, including those that already have drugs on themarket
along with those that have yet to get the Food and Drug
Administration seal of approval.
Large pharmaceutical companies, while partnering with
development stage biotechs, typically seek to acquire companies
with drug approval already in hand. Here are four biotech stocks
that may soon be in the crosshairs of Big Pharma.
1. Onyx Pharmaceuticals (Nasdaq:
For a number of years,
was one of the hottest stocks in this sector, thanks to a strong
franchise in the area ofmultiple myelomas, or blood cancers. The
company has parlayed its success into a current $31 billionmarket
value . Some investors say Onyx Pharma, which has seen a string of
recent clinical advances, may be "the next Celgene." Notably, the
company's current $5 billion market valuation makes it more
digestible for a Big Pharma acquirer.
Onyx's most important drug is Nexavar, which has already been
approved to treat liver and kidney cancer, and is being tested for
broader applications such as thyroid and breast cancer. Bayer is
already a key marketing partner with Nexavar and the most logical
firm to make anoffer for all of Onyx. Onyx has also just begun
selling Kyprolis, which is expected to takemarket share in the
multiple myeloma market Celgene currently dominates.
2. Biomarin Pharma (Nasdaq:
Big Pharma firms don't like to acquire just a promising drug, they
like to acquire broad drug development platforms. They know that if
the basic science works in one area, then it could end up serving
as the basis for many other drugs that may treat different types of
This helps explain the appeal of Biomarin, which has been
developing a portfolio of genetic disease therapeutics. The company
targets treatments for rare diseases, which mayyield only a small
patient population, but a high level of spending per patient. For
example, its Aldurazyme drug targets a global population of just a
few thousand people, but is on track to generate roughly $200
million in sales this year, thanks to a $200,000 per patient price
Biomarin now has more than $400 million in annual sales, though
this figure could spike sharply if the company's Kuvan drug takes
off as the company hopes. This drug treats phenylketonuria, a
fairly common metabolic disorder. The key will be whether the
longer-term efficacy data (due out in coming months) will convince
more doctors to prescribe the drug, and whether Big Pharma will sit
up and take note.
3. Exelixis (Nasdaq:
By the end of this year, this firm may finally get the FDA green
light to market cabozantinib, a drug for thyroid cancers. But
that's not why investors are focused on this stock. Instead, it's
the drug's testing on prostate cancer, currently in Phase III
clinical trials, that holds even greater promise. If successful,
Exelixis may be able to target a market exceeding $500 million
annually (notably higher than the potential $200 million thyroid
The company is also testing cabozantinib to see whether it is
effective in the treatment of kidney, liver, lung and ovarian
cancer. Further clinical progress in these areas just might
convince a Big Pharma player that this is a drug development
platform worth acquiring.
4. Threshold Pharma (Nasdaq:
I laid out my reasons for why this biotech firm is so appealing
back in February
and thoughshares have continued to move well higher since then,
they still look like a bargain. More to the point, Threshold's drug
development platform, known as TH-302, can be applied to many kinds
of tumors, which is just the kind of broad opportunity that Big
Pharma looks for.
Threshold already has deep ties to Germany's Merck KgA, which
makes that company a logical potential buyer. That relationship may
actually keep Threshold from attracting other offers, so it is
likely up to Merck KgA to decide whether it's better to pay out big
milestone payments to Threshold, or simply write one large check to
acquire the company.
Risks to Consider:
These stocks have had a nice run in anticipation of even better
days ahead -- or an outrightbuyout -- so they carry a
higher-than-usual risk of a pullback if there are clinical setbacks
or a buyer fails to emerge.
Action to Take -->
As noted earlier, a basket approach to these stocks is prudent to
limit company-specific risk. Yet these companies are working at the
forefront of cancer research, and their years of hard work and
heavy investments could be just starting to pay off.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.