One of the great attractions of healthcare stocks is the potential to find a company on the verge of a major breakthrough that sends share prices rocketing to dizzying heights. Indeed, almost everyone has heard stories of investors scoring a ten-bagger from a healthcare stock, even if they can’t boast of a similar experience themselves.
Over the past few years, the biotechnology space has become prime hunting ground for investors hoping to win big.
Biotechs develop drugs that treat disease by exploiting our biologic pathways. The burgeoning industry has about 250 healthcare products currently in use.
Beyond the healthcare arena, biotechs are also involved in many other avenues of research, including agricultural biotech products and biofuels. In fact, there are already about 50 biorefineries in various stages of development in North America alone.
Given those diverse areas of research, the biotech space offers ample opportunity for investors. For instance, last year the NASDAQ Biotechnology Index jumped 32.1 percent, roughly double the return of the S&P 500. And over the past three years, the biotech index gained more than 20 percent annually, compared to a 13 percent annual return for the S&P.
Of course, such heady gains are accompanied by significant risk. The biotech sector can be a veritable minefield for investors, littered with losers that failed to bring a product to market. As a result, even winning biotech companies can be highly volatile investments.
But for investors who want to gain exposure to these groundbreaking treatments, the very best companies in the industry offer little risk and the possibility of substantial upside.
Amgen (NSDQ: AMGN) was founded in 1980 and is considered one of the original biotechnology companies. The products it’s developed over the years include treatments for everything from bone disease and cancer to kidney disease and rheumatoid arthritis.
Amgen is one of the largest biotech companies in the world, with a market capitalization of almost $67 billion. The company went public in 1983 and has one of the longest histories in the biotech industry as a publicly traded company. It also happens to be one of the most fairly valued at the moment, trading at just 15.6 times trailing 12-month earnings versus the industry average of 43.3. And it trades at just 10.5 times forward earnings.
This relative value is the result of Amgen’s lack of new blockbusters over the past couple years. Since the company is so large, it takes a huge winner in the marketplace to move the company’s revenue needle.
But that could change over the next year or so. Amgen currently has an attractive pipeline with 43 drug candidates in various stages of development, including 18 in phase I clinical trials, 13 in phase II, and 12 in phase III.
There are eight compounds in late-stage trials that could soon be submitted to the Food and Drug Administration (FDA) for approval. Among these compounds are romosozumab, a treatment for postmenopausal osteoporosis, brodalumab (psoriasis), rilotumumab (gastric cancer), trebananib (ovarian cancer), and talimogene laherparepvec (malignant melanoma).
Romosozumab is one of Amgen’s most promising compounds. It uses humanized monoclonal antibodies to promote new bone growth in postmenopausal women and can only be taken while a fracture is healing. By contrast, currently available therapies strengthen existing bone to prevent fractures and are therefore typically taken over the long term.
The FDA recently announced new, tougher standards for approving drugs designed to promote bone healing and, as a result, Amgen halted testing on romosozumab earlier this month to reevaluate how to proceed. But the studies conducted to date didn’t indicate any meaningful safety risks, so Amgen is expected to resume studies on romosozumab later this year.
The company even has an eye toward broadening the compound’s indication to expand its use for treating osteoporosis-related fractures generally rather than aiming specifically at postmenopausal women. Given the huge worldwide osteoporosis market, romosozumab could eventually be a major blockbuster.
In addition to its own late-stage candidates, Amgen recently announced that it also plans to enter the biosimilar market.
Amgen is already a leader in the biologics market, which encompasses drugs designed using human cells or DNA that are made through biologic processes, rather than through chemical synthesis. Biosimilar drugs are essentially generic biologic drugs. They’re similar but not identical to existing biologic drugs and are generally less expensive than the originals.
These six drugs could eventually generate about $2 billion in annual revenues.
With its expertise in biologics, Amgen shouldn’t have any trouble establishing itself in the biosimilar market and eventually becoming a leading generic producer of biologic drugs. And Amgen’s pipeline of both biologics and biosimilars means that it’s poised to generate sizable gains for biotech investors for years to come.
For those investors who have a greater tolerance for risk, I’ll be highlighting some of my favorite development-stage biotechs next week.
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