Why Investors Are Paying a Premium for These 3 Biotech Stocks

So far, 2018 has been full of ups and down for the biotech industry as a whole. For these three stocks, though, prices have swung so far in a positive direction that investors are paying huge premiums now.

Just one of these companies has an approved product to sell but they're worth a combined $12 billion. Here's what has the market all riled up.

Company (Symbol) Market Cap
Amarin Corporation PLC (NASDAQ: AMRN) $5.8 billion
Editas Medicine, Inc. (NASDAQ: ARWR) $1.3 billion

Loxo Oncology, Inc. (NASDAQ: LOXO)

$4.9 billion

1. Amarin Corporation: Let's hope this one doesn't get away

Heart disease is still the leading cause of death even though millions of Americans take statins to reduce their cholesterol levels. Amarin stock exploded in September because it looks like Vascepa will become the next go-to drug for this enormous population. During the 8,179-patient Reduce-It trial, patients given Vascepa in addition to their normal statin treatments were 25% less likely to suffer a major cardiovascular event such as a heart attack.

Over the past year, Amarin Corporation actually lost $92 million because sales of Vascepa just haven't kept pace with operating expenses. Investors are paying a huge premium for this biotech stock now because millions of potential patients could turn Vascepa into a blockbuster drug with several billion in annual revenue.

We'll know more about the company's chances to live up to expectations and its $5.8 billion market cap after investigators present detailed results of the Reduce-It study. If disturbing caveats pour water on the initial results that drove the stock up in November, it could be a long, cold winter for shareholders.

2. Editas Medicine: Almost ready to begin

Though Editas Medicine hasn't dosed any patients yet, investors have given the gene-editing stock a market valuation on par with companies that have hard evidence their experimental therapies actually work. Although CRISPR mania appears to have already peaked, the premium investors are paying for this company could rise much further if EDIT-101 hits the mark in its first human proof-of-concept study.

Editas Medicine's lead candidate aims to prevent a leading cause of childhood vision loss from progressing with a single treatment. If the first candidate to emerge from Editas Medicine's CRISPR gene-editing platform works as intended, investors' opinion about a growing pipeline of preclinical stage programs will rise a few notches as well.

If the Food and Drug Administration approves an upcoming application that will allow human trials to begin, Editas Medicine stands to receive a $25 million milestone payment from Allergan PLC. The company's development partner also intends to split development expenses and any potential profits down the middle.

3. Loxo Oncology: Beginner's luck?

Investors are willing to pay a huge premium for this cancer-driven biotech because its first two attempts at beating specific tumors have hit the mark. The FDA is currently reviewing an application for larotrectinib as a treatment for any patient with tumors that harbor an NTRK gene fusion. Loxo Oncology rushed an application to the FDA supported by results that show tumor responses in 81% of patients treated with larotrectinib. Although there's a chance the FDA will ask for more information, a relative lack of side effects, combined with strong hints that it can improve patients' chances of long-term survival, will probably convince the FDA to give larotrectinib the green light.

This summer, Loxo Oncology, Inc. shot up again after investigators demonstrated that LOXO-292 shrank RET-altered tumors for a whopping 77% of patients treated. Loxo recently followed up with additional data that shows 96% of early responders with lung cancer were still responding months later.

Although eventual approvals of larotrectinib and LOXO-292 seem likely, it's important to remember that these therapies are aimed at genetically defined segments of populations that aren't very big to begin with. While Loxo's trial results are outstanding, successful drug launches are far from guaranteed.

A lot to lose

These biotechs have given investors some pretty good reasons to pay steep premiums for their shares, but that doesn't necessarily mean you should. Following some amazing run-ups, these stocks have a long way to fall if early hints of success don't pan out.

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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.