Gilead Sciences has an anti-aids franchise that is the envy of every drug company in the world, and it will only get better with the new integrase inhibitor currently working its way through the FDA. Gilead reported the best first quarter of any drug company—biotech or big pharma—because of its anti-aids cocktail. Gilead’s using its stock to buy other companies for a second line of drugs designed to battle hypertension, and its Ambrisentan pulmonary-arterial-hypertension drug just got fast-tracked by the FDA for 2007 review. Gilead’s been the best-performing major biotech for 2007, and I think that streak will continue.
You might have heard a collective shudder from the pharmaceutical industry when the Democrats took Congress. But you would only have heard cheers from the people at Genzyme, the drug company that pursues cures for illnesses that, frankly, simply don’t strike enough people to merit the attention of larger drug companies. The Democrats want research into small-scale illnesses that aren’t economical for bigger companies; that’s Genzyme’s ticket. (You could call it the special-interest drug company for the special-interest party.) The illnesses that Genzyme treats, like Fabry disease and Gaucher’s disease, just aren’t on the large companies’ radar screens. Genzyme has those markets all to itself. Same with its end-stage renal-disease drug, Renagel. With a great mosaic of hundred-million-dollar drugs, instead of one or two big ones that could be knocked out by the competition, Genyzme has ensured itself multiple years of strong growth and earnings.
Biotech companies are all about the future, with potential blockbusters in front of them, not behind them.
Next comes the wild card: Onyx Pharmaceuticals. Here’s a company that just saw its stock double within a week when it revealed that its Nexavar drug can inhibit the spread of liver cancer, one of the deadliest of all cancers, and something for which there is no approved treatment. Many on Wall Street think the stock’s move is too much; I could not disagree more. Liver cancer is so hard to treat and this drug is so unique that I have to believe that Onyx’s partner, Bayer, will want to buy this billion-dollar company just for the liver-cancer franchise. I think Bayer would be willing to pay double the price Onyx fetches now. Given the 18,000 new patients diagnosed with this illness each year in the United States, you could see the drug having $250 million in sales in no time. Even without a deal, you could still have some good upside.
For those who are willing to take some real risk—those who want on-the-move companies without a lot of profits (or none at all)—I’ve got two plays, Altus and Exelixis. These are true speculation ideas, ones that might not pan out at all, or could be home runs. That’s because these companies have drugs that are entering into Phase II or Phase III FDA trials, the last phases before approval. Of course, if the drugs fail, they could be history.
Altus is a drug-enhancement story, with two products that are about to start Phase III, one for cystic fibrosis, and the other for extended-release growth hormone. Drug enhancement means the compounds improve on a current medicine. Altus’s cystic-fibrosis drug allows patients to take pills less often. Altus’s growth-hormone replacement allows patients to take a shot once a week instead of once a day. Both are big-market opportunities.
Exelixis’s drugs are designed to interrupt the growth of cancerous tumors. It has four drugs in Phase lI. Like all experimental drugs, these compounds cost a lot of money to develop, and some of them are bound to fail. But Exelixis partners with Genentech, GlaxoSmithKline, and Bristol-Myers Squibb on these drugs. And if one of the drugs hits big, you could see any of these pharmaceutical giants buying the whole company (like Onyx). That’s why Exelixis has a market cap of almost a billion dollars.
Most people don’t want to part with their old, so-called safe drug stocks, even though they don’t go up anymore and feel more like bonds with a decent yield than stocks that can grow. But it’s time to say good-bye to the old-line drug companies that you’ve been clinging to, and move up to those that are going to make a difference for your portfolio and your kids’ college fund. I would sell any big pharma company and buy any one of these seven stocks. And never mind what happened last week: I would do it today.