Biotech stocks ended 2018 with a thud. However, the industry has clearly regained its footing early on in 2019, evinced by the iShares Nasdaq Biotechnology Index's 16% surge higher during just the first six weeks of the new year.
So, with the biotech space solidly on the comeback trail, we asked three of our Motley Fool contributors which stocks they think are poised to keep churning higher in February and perhaps for the remainder of the year. They suggested Viking Therapeutics (NASDAQ: VKTX), Cambrex (NYSE: CBM), and Sarepta Therapeutics (NASDAQ: SRPT). Here's why.
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A hidden gem in biotech
George Budwell (Viking Therapeutics): Viking Therapeutics is a small-cap biotech with jaw-dropping growth potential. The big draw with this name is the company's outstanding clinical pipeline that sports two potential blockbuster products: VK2809 that's indicated for fatty liver disease and nonalcoholic steatohepatitis (NASH), as well as the experimental hip-fracture recovery candidate VK5211.
Among these two drug candidates, the market is primarily focused on the fate of VK2809 right now. The NASH market, after all, is projected to reach a mind-boggling $35 billion in sales in the next decade and there are currently no treatments approved for this enormous market. And as an important aside, Gilead Sciences' selonsertib recently flamed out in a late-stage study for NASH, potentially setting the stage for the biotech heavyweight to acquire one or more of the smaller NASH players like Viking soon.
Why is Viking's VK2809 so intriguing from a valuation standpoint? Last year, the drug showed a remarkable ability to reduce liver fat content at fairly low doses in only a 12-week time frame. Equally as critically, the drug also didn't produce any serious adverse events in this mid-stage trial -- putting it in the running to be one of the most potent and safest treatment options for fatty liver disease in general and perhaps NASH in particular.
What now? The company is gearing up to evaluate VK2809 in another mid-stage trial specifically designed for NASH patients. If this next trial is successful, Viking's stock should turn out to be a big winner for early-bird investors. As such, this relatively unknown biotech arguably deserves a serious look by risk-tolerant investors this month.
How often do "cheap valuation" and "biotech" apply to the same company?
Chuck Saletta (Cambrex): It's incredibly rare for a biotech company's stock to look legitimately value priced. Often, they start out looking expensive because the company has little to no revenue unless or until it gets a product approved. Then, once it gets approval, its shares often skyrocket before ordinary investors get a shot at buying on the news. It's frequently only after that product nears the end of its patent protection that the company's shares fall to Earth, on fears that its revenues may soon dry up.
Despite that fairly typical life cycle, there's one biotech company whose shares today look legitimately value priced: Cambrex. Its shares trade at around 11 times trailing and 14 times anticipated earnings, and those earnings are expected to grow by around 15% annualized over the next five or so years. Cambrex even sports a solid balance sheet, with around a 0.5 debt-to-equity ratio and a current ratio above 4.5 .
What makes Cambrex different from most other biotech companies is that it has figured out a model that lets it profit from other companies' successful research efforts. It operates with something of a "picks and shovels" model in the industry. It provides active pharmaceutical ingredients and manufacturing services to other pharmaceutical and biotech companies.
Cambrex creates fairly symbiotic relationships with that model. It benefits by getting a cut of all its customers' revenues from the ingredients it supplies and the products it makes for them. Its customers benefit from not having to invest the capital and expertise at building, validating, and operating an FDA-licensed pharmaceutical plant, the overhead of which can be substantial.
That model gives Cambrex -- and its investors -- the potential opportunity to profit as long as there's demand for biotech products, without all the research-related risks common to the industry. Trading at the reasonable valuation it does for its prospects, Cambrex certainly looks worthwhile of consideration this February.
A competitor's stumble makes it a good time to buy this biotech stock
Todd Campbell (Sarepta Therapeutics): This gene therapy developer appears to have the market for treatments for Duchenne's muscular dystrophy (DMD) in the U.S. to itself for a while longer. On Feb. 7, clinical-stage competitor Solid Biosciences reported disappointing results from a phase 1/2 trial, forcing it to reconsider its approach.
Sarepta Therapeutics' Exondys 51, the only FDA-approved treatment on the market for DMD today, helps restore dystrophin production in roughly 13% of DMD patients. In 2018, Exondys 51's sales totaled $301 million, up from $155 million in 2017.
In 2019, Sarepta Therapeutics hopes to secure an approval of its second DMD drug, golodirsen, which could increase the company's target market by 8%. Data that could support the filing for a third DMD drug targeting another 8% of the population is also expected this year.
Ultimately, the goal is to come up with therapies for all DMD patients. To that end, Sarepta Therapeutics and Solid Biosciences are both working on approaches that insert a gene into patients, allowing them to produce a truncated yet functional form of dystrophin. These microdystrophin approaches are intriguing, but it may be that only Sarepta Therapeutics has figured out the best way to do it. Sarepta Therapeutics is saying it's encouraged by the data it saw in a small trial last year, and that's something Solid Biosciences can't say after today.
Other competitors are also targeting the indication, but Sarepta Therapeutics remains at the forefront, and that makes it a top stock to consider buying now.
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Chuck Saletta has no position in any of the stocks mentioned. George Budwell owns shares of Sarepta Therapeutics and Viking Therapeutics. Todd Campbell owns shares of Gilead Sciences. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has a disclosure policy.