Investment Strategies for the Bullish Biotech Sector
So far, 2015 has been a great year for biotech stocks. When we look at broad activity in the iShares NASDAQ Biotechnology Index ETF (IBB), we can see gains of more than 20% year-to-date and these strongly bullish trends have brought a lot of new attention to the sector. And while these types of gains might seem unsustainable, the historical trends prove otherwise.
But conservative investors that are looking to protect themselves from potential losses and excessive volatility will need to keep a discerning eye when buying into markets that have already experienced a significant rally. For these reasons, it makes sense to identify companies that are positioned to benefit from the positive momentum currently seen in the biotech space but still generate sustainable gains going forward. Here, we will discuss four of the best stock choices for long-term investors that are looking to increase exposure to the biotech sector.
Industry Leaders in Biotech
When we look at the historical trends, the biotech sector is often characterized by elevated volatility levels when compared to other sections of the market. This can be a cause of concern for investors that have developed a more conservative mindset. But when we look at some of the best established names, there is a clear opportunity to removed some of this perceived risk. One company that falls into this category is Biogen, Inc. (BIIB), which is one of the leading large-cap stocks in the space. There is a variety of reasons for why Biogen has established such a strong position in the sector but one key element that shouldn't be overlooked is the company's work in developing therapeutic strategies to treat multiple sclerosis, or MS.
In this field, Biogen is ahead of its competitors by a wide margin as many of the central strategies that are being used to treat MS have changed over the last few years. Specifically, we have started to see a transition from injectable treatments to oral treatments and these trends have led to significant revenue gains for Biogen's Tecfidera drug offering. Most of the clinical trials have shown that Tecfidera is associated with far fewer side effects when compared to the products offered by Biogen's man competitors. In addition to this, Biogen has one of the most impressive drug pipelines in the sector, and many of these are likely to be viewed as leading alternatives for a number of different illnesses. More than 15 sector analysts have rated the stock as a "buy," so we are likely to continue seeing gains in this well-liked stock.
Next, we look at Argos Therapeutics, Inc. (ARGS), which is now focused largely on developing and marketing immunotherapies that are fully personalized and can be used in the treatment of infectious diseases and cancer. Perhaps most impressive is the company's Arcelis technology platform, which enables cancer patients to receive treatment using their own dendritic cells after being exposed to a strategic set of tumor antigens. In terms of drug offerings, the key name to watch is the company's vaccine for renal cell carcinoma, AGS-003. The drug is currently in Phase 2 trials but there have been some encouraging developments that suggest extended survival rates when compared to similar trials that were conducted by Sutent.
Analyst target prices for ARGS stock run as high as $17, which is significant given the fact that the stock is currently trading below $8 per share. All of this points to strong potential upside for longer-term investors, and these are gains that could be easily realized if we see continued progress in the combined AGS-003 trials.
Both Argos and Biogen are both excellent choices when we look at both stocks in terms of their long-term stability and strong name recognition. Where these stocks lack, however, is in their potential for growth. So for investors that are looking for promising companies that are still in earlier stages of development, it will be important to broaden the field of view when looking for new opportunities.
One of the best-positioned names that fall into this category can be found in Endonovo Therapeutics, Inc. (ENDV), which is a quickly expanding biotech that is developing off-the-shelf regenerative treatments that do not require stem cell injections. Endonovo's first platform, Cell Free Therapeutics, treats injuries and chronic diseases by utilizing biological cell secretions. The company's second platform is designed to deliver non-invasive bioelectronics that can stimulate the body's natural regenerative systems and treat inflammatory diseases. These innovative approaches to common afflictions are likely to be rewarded by the market, given the broader trends that have been seen in the biotech sector over the last decade.
In the chart above, we can see level of venture capital that is devoted to each of the major health care sectors. The trends here clearly show that biotech, pharmaceuticals, and medical devices can be combined to form a significant majority in the allocation of investment resources, so it is important for investors to identify companies that are positioned to capitalize on trend expansion in these areas.
Another selection that falls into this category is BIND Therapeutics, Inc. (BIND), which is clinical stage company focused on developing nanomedicine platforms. Its Accurins pipeline (novel targeted therapeutics) will likely be leveraged in oncology through its Medicinal Nanoengineering platform but there is scope for this to expand in collaboration with several biopharmaceutical companies down the line. The company's leading drug candidate is BIND-014, which is an Accurin that targets the prostate-specific membrane antigen (PSMA). BIND-014 also contains docetaxel, which is a drug that is widely used in cancer chemotherapy and has been clinically validated.
BIND stock is likely to see substantial benefit if the company is able to successfully structure its financial collaboration deals and there are several analyst estimates calling for price targets as high as $25 -- more than double its current market valuation.
Selecting A Strategy
Each of these stocks is well-positioned to capitalize on the momentum that is currently seen in the biotech space. So investors that are looking to gain exposure to the sector will need to select a strategy that rests in line with the level of risk tolerance that is associated with your portfolio design. "Strategies that focus on large cap stocks tend to benefit from reduced volatility and relatively steady gains, said Steven Davis, sector analyst at 4K Research. "But given the recent moves that we have seen in large caps, there is a strong case to be made for the growth outlook centering on smaller cap alternatives." With this in mind, stocks like ENDV start to look much more attractive for those looking to increase exposure in biotech.
Looking ahead, overall growth at Endonovo will be determined largely by its success in developing its bio-electromagnetic products designed to stimulate regeneration in damaged human tissue. The company's most recent efforts involve pre-clinical tests for its electroceutical technology that will be used in treatments in liver pathology (both acute and chronic). These offerings will be useful for patients with cirrhotic liver disease and nonalcoholic steatohepatitis, so there is a strong segment of the market that will likely benefit from the new technologies designed by Endonovo. According to recent reports from the American Liver Foundation, up to 30% of the US population suffers from some form of nonalcoholic liver disease, so the growth outlook for Endonovo is strong once these technologies are made publicly available.
Chronic obesity problems in the US and abroad have led to increases in complications that them from fat buildup in the liver. This is a growing problem but many companies have looked to attack these issues from the pharmaceutical side of things. At this stage, Endonovo looks to be at the forefront in the move toward non-invasive electrotherapies that could define future trends in overcoming conditions that are now virtually untreatable (cirrhotic liver disease, for example).
Currently, Endonovo Therapeutics shows a market cap of just under $100 million. But when we take all of these factors into consideration it quickly becomes clear that smaller cap stocks should not be ruled out when developing an investment strategy to increase portfolio exposure in biotech. To be sure, the biotech space is vulnerable to sharp movements in price in cases where clinical trials fail or the FDA chooses not to approve specific treatments. But when trials progress as planned and the FDA approves treatments, the potential for upside is often massive. These are all factors that should be considered as viable in the current market environment, given the bull rallies that have been seen in biotech over the last few years. Investors have important decisions to make in determining the best approach for choosing individual stocks in the space but there is a compelling case to be made for small cap names that have room to run higher in an already elevated market.
Published on May 26, 2015By Richard Cox