The biotech sector tends to scare a lot of investors, and for good reason. The failure rate is high, the cash needs can be huge, and regulatory decisions can make or break an investment.
So which biotech stocks do we Fools think are worth the risk? We asked a team of investors to weigh in and they highlighted Madrigal Pharmaceuticals (NASDAQ: MDGL), Cambrex (NYSE: CBM), and Pieris Pharmaceuticals (NASDAQ: PIRS).
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A potential top acquisition target for 2018
Keith Speights (Madrigal Pharmaceuticals): I'm going to step out on a limb just a bit with my pick. Madrigal Pharmaceuticals doesn't have any drugs on the market yet. It doesn't even have a pipeline candidate in late-stage testing. But I think this small biotech could be a big winner.
Actually, the stock already is a big winner. Madrigal ranked as the No. 3 healthcare stock of 2017, with a whopping 516% gain last year. So far in 2018, the stock is up well over 50%. Why such excitement over a clinical-stage biotech? Madrigal claims a very promising drug for treating nonalcoholic steatohepatitis (NASH).
The company reported impressive results in December from a phase 2 study of MGL-3196. Three-fifths of patients taking MGL-3196 attained a 30% or more reduction in liver fat, which has been found to have a high correlation with improvement in NASH. Patients taking a higher dose of MGL-3196 experienced an even greater reduction in liver fat. The statistical improvement over placebo came with a p-value of less than 0.0001. If you're not a statistics guru, just know that means Madrigal can be really confident in the statistical significance of its phase 2 results.
NASH could very well be the next huge market for the biopharmaceutical industry. I think that the potential for MGL-3196 probably has big drugmakers drooling over Madrigal. It wouldn't surprise me to see this biotech scooped up soon.
A "picks and shovels" stock in the biotech gold rush
Chuck Saletta (Cambrex): Speculators hoping to strike it rich these days look for gold in the potential cures to modern illnesses offered by biotech companies. Yet just as many prospectors bombed out during the California gold rush, many biotech companies are destined for trouble -- either their research doesn't pan out, or their financing doesn't last long enough to bring their research to market.
Enter Cambrex, a biotech company that specializes in helping other healthcare companies get their active pharmaceutical ingredients (APIs) developed and manufactured. What they're essentially doing is acting like the merchants who sold picks and shovels to prospectors during the gold rush. Everybody with a medicine needs it manufactured, but there are costs and regulatory compliance issues associated with doing so, making outsourcing that work to a specialist a great choice for many companies.
Its choice of area to operate in gives Cambrex a better shot at reliable profitability than most other biotech companies. What makes it a worthwhile potential investment now is its reasonable price compared to its anticipated profits. Cambrex currently trades at a mere 17 times its anticipated earnings, and those earnings are expected to grow by around 15% annualized over the next five years. That's a reasonable price to pay for any company, much less one in the high-risk world of biotech.
Big pharma is betting on this platform
Brian Feroldi (Pieris Pharmaceuticals): About 90% of compounds that enter clinical trials fail to make it to market. That sobering fact makes it hard to pick biotech winners. However, one shortcut I use to separate the wheat from the chaff is to look for stocks that have already performed extremely well and have caught the attention of the big players in the space.
One company that checks both of those boxes with ease is Pieris Pharmaceuticals. Pieris is a clinical-stage biopharma focused on anemia, immuno-oncology, and respiratory diseases. A handful of positive developments caused the company's stock to skyrocket 437% in 2017, a huge jump that put this company on my radar. When I found out that Pieris has already signed a number of collaboration deals with big pharma companies like AstraZeneca, Allergan, Sanofi, Roche, Daiichi Sankyo, and most recently Seattle Genetics, my ears really started to perk up.
So what makes Pieris special? The company's proprietary technology allows it to quickly create engineered proteins that can be used to target a wide variety of diseases. Moreover, the company touts its proteins as safe, effective, and able to be flexibly dosed. With 12 compounds currently in development in three main disease categories, the company offers investors multiple shots on goal.
While it is still too early to tell if Pieris' technology is the real deal -- the company's most advanced product candidate is still just in phase 2 -- the early signs look encouraging. What's more, the company has pulled in more than $120 million in upfront and milestone payments from its partners in the last 14 months alone. That speaks volumes about their votes of support for the company's drug development platform.
Looking ahead, investors can look forward to a handful of data readouts in 2018 that could lead to additional upside. While the risks here are still huge, I think that Pieris has enough going for it to justify a small investment today.
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Brian Feroldi has no position in any of the stocks mentioned. Chuck Saletta has no position in any of the stocks mentioned. Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends Seattle Genetics. The Motley Fool has a disclosure policy.