Over the past half decade, large biotechnology stocks have delivered robust gains across the board. These companies sell a range of very popular drugs and have been generating massive profits.
At the other end of the spectrum, small biotechs, most of which are still in their developmental stage, have been a hit-or-miss proposition, with a lot more hits and misses.
Yet one group of small biotechs has been on fire, and gains look set to continue. Investors are only now coming to realize that the young, recently-public companies working on gene therapy aren't a flash in the pan, but a vanguard in the fight against many maladies.
Since I profiled these stocks a year ago, they have exploded higher. On average, they have risen 191% over the past 12 months. (For more background, please read the April 2014 article.)
The catalysts for these stocks are quite clear: either they have announced impressive clinical advances, or secured the endorsement (and financial backing) of the big drug makers. For example:
In December 2014, bluebird bio, Inc. (Nasdaq: BLUE) announced that patients in early stage trial were given the company's LentiGlobin355 drug, and their need for chronic blood transfusions simply ceased. Shares surged when the news was announced, and they keep rising.
UniQure NV (Nasdaq: QURE) had been making a series of promising announcements regarding its drug development path throughout 2014. Yet shares really caught investors' attention earlier this month when Bristol-Myers Squibb Co. (NYSE: BMY) announced a deal to license UniQure's gene therapy platform, replete with a series of upfront and milestone payments.
Shares of Celladon Corp. (Nasdaq: CLDN) had also been up more than 100% (since April 2014), but have recently sold off on concerns that the company's Mydicar drug may not have sufficient efficacy to merit FDA approval.
Applied Genetic Technologies Corp. (Nasdaq: AGTC) has yet to garner much buzz with its drug development efforts.
But what about Bluebird Bio and Uniqure? After delivering such great returns, do they still possess further robust upside? Yes, they do, for risk-tolerant investors with multi-year time horizons.
Regarding UniQure, I noted a year ago that the company "appears to offer the most appealing broad-based approach to gene therapy, and its sub-$150 million market value also makes it a relative bargain." Well, that market value is now approaching $500 million, so we need to stop thinking of this stock as a bargain. Instead, it needs to be viewed in terms of its total addressable market opportunity.
Simply put, the company's total addressable market opportunity is very large. In the second half of this year, UniQure will deliver a clinical trial update regarding patients that have Hemophilia B. Although it afflicts only one in every 25,000 people, current treatments are extremely costly. Patients require a $2,500 injection three times a week. Analysts at Leerink Swan, an investment firm solely-focused on healthcare, think that the Phase I/II data will prove to be the next catalyst for this stock, and they see nearly 100% upside to their $50 target price.
Analysts at BMO Capital are also bullish. They just initiated coverage of UniQure with a $49 price target, noting that the company's work in the area of congestive heart failure could prove to eventually develop very robust revenue streams.
Here's where the important biotech caveat comes in: UniQure and other gene therapy firms are showing great progress early in their clinical development work, but investors won't fully believe in this medical approach until large-scale Phase III trials are well underway. That means such stocks require a multi-year time horizon.
Bluebird bio faces similar opportunities and threats. The company's gene therapy technologies appear to hold great promise for sickle cell disease, ALD (the "Lorenzo's Oil" drug discussed in last year's article) and several other "monogenic" (or single gene disease) disorders. The key distinction between these gene therapy firms and other biotechs is that the gene therapy approach would yield a one-time permanent cure, rather than years of costly treatments,
The actual number of sufferers of such disorders that the gene therapy firms are targeting is relatively small. Yet "single-treatment, gene therapy-based cures could be priced at $500,000-plus per patient in the developed markets, and still offer a compelling cost-benefit profile for payors and patients," note analysts at Roth Capital Partners.
Risks To Consider: These companies are working on similar approaches and the market won't warrant multiple drugs that have a largely identical approaches and outcomes. For example, Baxter International, Inc. (NYSE: BAX) already has a strong franchise in Hemophilia and other diseases the these gene therapy firms are targeting. Baxter may reach the finish line first, severely shrinking the market opportunity for UniQure and others.
Action To Take --> While investors are largely focusing on incremental clinical progress at these firms, it is wise to take the broader view. These companies aren't just targeting specific niche diseases, they are targeting the human genome. Success in some areas may well yield even deeper breakthroughs in much larger target markets that are not yet currently being addressed. In effect, these companies are doing "moon shot" research, and as a result, you should see them as high-risk and high-reward biotech opportunities.
After a 546% one-year gain, shares of bluebird bio may have topped out in the near-term. Instead, investors should consider UniQure, which has a set of upcoming milestones, a key Big Pharma partnership and a strong balance sheet.
If you choose to invest in a gene therapy company, then you need to track the actions and progress of all of the industry's participants. That includes other publicly-traded companies such as Sangamo Biosciences, Inc. (Nasdaq: SGMO), GenVec, Inc. (Nasdaq: GNVC), privately-held companies and the research efforts of the big drug companies. You can read about gene therapy trials here and the government's perspective on the topic here.
Oftentimes the little ideas are the big game changers -- something like curing a disease using gene therapy. My colleague Andy Obermueller devotes his time to identifying game-changing trends and the companies that should benefit from this. This has led readers to investments that went on to gain triple-digits.
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