Biotech investors are having a great start to 2019. Shares of the SPDR S&P Biotech ETF are up 19% since Jan. 1, which is a heck of a run in such a short time.
But which biotech stocks are worth a closer look during this recent rally? We asked three Motley Fool contributors to weigh in, and they picked Galapagos (NASDAQ: GLPG), Celgene (NASDAQ: CELG), and Zealand Pharma (NASDAQ: ZEAL).
Big news is on deck for this clinical-stage biotech
Todd Campbell: (Galapagos): This foreign-based biotech might not be on your radar. If it isn't, it should be. The company expects data on its lead drug candidate soon, and if the data is positive, it could represent a multibillion-dollar opportunity for the company and its collaboration partner Gilead Sciences (NASDAQ: GILD).
The two companies have already reported that their rheumatoid arthritis drug filgotinib effectively improved symptoms on a common scoring method in one trial last fall. Results from two additional phase 3 trials that could support filings for approval in the U.S. and Europe are expected before the end of March. If the trials read out similarly to the first trial, then an application for approval could get filed in both markets before the end of this year, clearing the way for commercial sales sometime in 2020.
There are about 1.5 million people diagnosed with rheumatoid arthritis in the U.S. alone, and existing treatments can cost tens of thousands of dollars annually. As a result, this indication has spawned a slate of megablockbuster medications, including Humira, the world's best-selling drug with over $19 billion in sales per year. Galapagos and Gilead Sciences think filgotinib could be a more effective and safer option than existing treatments. If they're right, then filgotinib's commercial opportunity may be massive.
Success would benefit Gilead Sciences most, but it will move the needle more for Galapagos. If it is eventually approved, it will be Galapagos' first commercial drug. A win could net Galapagos up to $1.35 billion in milestones from Gilead Sciences, plus Galapagos can pocket royalties on U.S. sales ranging between 20% and 30%. In Europe, the companies will split profits equally.
Given that Galapagos' market cap is only $5 billion, positive trial results could cause its shares to rally sharply higher. However, there's no guarantee of success, so only risk-tolerant investors should consider buying it before the data is unveiled.
Heads I win, tails I win
Brian Feroldi (Celgene): Shares of Celgene skyrocketed in early January after news broke that it was being bought out by pharma giant Bristol-Myers Squibb (NYSE: BMY) for about $74 billion. The deal valued Celgene at about $102.50 per share plus the potential to earn an extra $9 if certain conditions were met. Given these figures, why are shares trading for under $86 today?
The primary reason appears to be that Wall Street doesn't think that the deal will ever happen. Between the potential pushback from regulators and a few large shareholders that have come out against the deal, there isn't a lot of faith out there that this acquisition will ever close.
That uncertainty is providing investors with an interesting opportunity right now. If the deal does go through as planned in the third quarter of this year, then shareholders who buy today would earn a double-digit return on their money in just a few months. If the deal doesn't work out, then Celgene's shares will probably drop a bit, but buyers are still getting a terrific value.
Celgene just reported 16% revenue growth and 20% adjusted profit growth in the fourth quarter. Management guided for adjusted profits to grow another 21% in 2019 to a range of $10.60 to $10.80 per share. With shares currently trading around $85, this means that they can currently be purchased for slightly more than 8 times earnings. That's a highly attractive valuation for a stock that is still posting double-digit earnings growth.
Investors are absolutely assuming some risk by buying shares today, but I think that Celgene's stock is a great value no matter the outcome.
A potential treatment for the opposite of diabetes
Chuck Saletta (Zealand Pharma): Diabetes is an awful disease that affects over 400 million people around the world. It is frequently lifelong, with life-threatening consequences if left untreated or unmanaged. Yet despite the consequences of diabetes, there are some people for whom it beats the alternative diagnosis: a disease called congenital hyperinsulinism.
While it's a fairly rare disease, affecting around 1 in 50,000 newborns, congenital hyperinsulinism can cause permanent brain damage. As a result, many with the disease have part or all of their pancreas removed, which can ultimately lead to diabetes.
Zealand Pharma has a potential treatment for congenital hyperinsulinism, dasiglucagon, that just entered phase 3 clinical trials. If it is successful, it could prevent the need for patients to have their pancreas removed -- allowing them to live far more normal lives without developing diabetes as a "less awful" alternative. The same compound is in trials to treat other forms of hypoglycemia -- including hypoglycemia that results from mis-dosed insulin in diabetics.
That ability to treat multiple forms of hypoglycemia makes dasiglucagon a compound with a billion-dollar-a-year market potential if it passes its phase 3 trials. Zealand Pharma's current market capitalization is around half that amount, which makes it an intriguing candidate for consideration as a potential investment.
If the phase 3 tests for dasiglucagon prove successful, Zealand Pharma expects to file a new drug application by the end of this year. That gives investors a limited window to buy before a decision is made that could result in a major move in the company's stock. Note that Zealand Pharma is not currently profitable, driven by its heavy research and development budget, which means that it is a high-risk investment despite the potential reward if it's successful.
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Brian Feroldi owns shares of Celgene. Chuck Saletta has no position in any of the stocks mentioned. Todd Campbell owns shares of Celgene and Gilead Sciences. The Motley Fool owns shares of and recommends Celgene and Gilead Sciences. The Motley Fool has a disclosure policy.