Biotechs the Hottest Sector at This Time?

Biotechs the Hottest Sector at This TimeOne of the hottest areas of the stock market over the last few years has been one of its most speculative. Biotechnology stocks, as evidenced by the NASDAQ Biotechnology Index, have been on a tear for the last three years.

This index was 1,000 at the end of 2011; it was 1,500 by the beginning of 2013; and now, it’s just shy of 3,200 for an all-time record-high.

This specific sector trades on its own and there is plenty of institutional money willing to speculate on a hot drug—or rather, the potential for a hot drug.

One company that perfectly illustrates the fervor that investors have for biotechnology stocks is Agios Pharmaceuticals, Inc. (AGIO).

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The stock was recently trading around the $40.00-per-share level; now it’s $100.00 and still a hot commodity.

What the company is doing is developing treatments for “inborn errors of metabolism,” or IEMs, which management feels is an unexplored area of cancer research.

The company, in collaboration with Celgene Corporation (CELG), is working on “AG-221,” which was recently given fast-track designation by the Food and Drug Administration (FDA).

As recent as October, Agios Pharmaceuticals initiated a phase 1/2 clinical trial of AG-221 for patients with advanced solid tumors with mutated forms of the isocitrate dehydrogenase (IDH) protein, which occurs in a range of cancers.

The company’s third-quarter collaboration revenues were $33.9 million, compared to $6.3 million in the same quarter last year. The company is spending a great deal of money on its research and it finished the third quarter with $238 million in cash, which management plans to spend by mid-2017.

If there is one sector of the stock market where speculators can capitalize on share price momentum, it’s with biotechnology stocks.

Fair valuation goes out the door when institutional investors decide a drug has good potential. Agios Pharmaceuticals is now worth $3.55 billion, even though the company hasn’t sold anything yet.

Naturally, the other side of the coin is risk. It takes enormous amounts of cash to even get a drug ready for clinical trials. Biotechnology stocks are 100% risk-capital securities; however, a mature name like Celgene or even an Amgen Inc. (AMGN) has proven to be highly profitable over time.

While a bull market in stocks contributes to the action in the biotechnology sector, this group tends to trade on its own fundamentals. There is just so much money at stake with the right drug.

Alexion Pharmaceuticals, Inc. (ALXN) is a company we looked at before in these pages. This company really only has one main drug in the marketplace: “Soliris,” which is a therapy for a rare blood disorder. (See “Biotechs Still a Trader’s Paradise?”)

The stock is around $200.00 a share currently. It was $120.00 one year ago, and $75.00 a share at the beginning of 2012.

What I like to see transpire with a developing biotechnology company is collaboration with a well-heeled, established drug development firm. The cash infusion is always a bonus, and it helps legitimize the story in the eyes of institutional investors.

Of course, being such risky securities, biotechnology stocks can lose money at a tremendous clip. If speculating in the sector, hitting the “sell” button is just as crucial as discovering the right story.