Biotech stocks tend to be a lot riskier than your average investment. But if you buy a basket of biotechs today and hold onto them for long enough, the balance of risk and reward should be tilted in your favor. Let's examine three companies suitable for such a strategy, starting with the least risky of the bunch.
1. Catalyst Pharmaceuticals
In a nutshell, Catalyst Pharmaceuticals' (NASDAQ: CPRX) approach is to buy the rights to sell therapies for rare diseases, either by purchasing late-stage programs and finishing development or by buying commercialization licenses outright. And with $121 million in fully liquid assets as of the third quarter of 2023, plus a stock offering of $150 million in early January and negligible debt, it has plenty of dry powder on hand to carry out its goals.
Over the last five years, the biotech's trailing-12-month normalized earnings per share (EPS) rose by 550% to reach $0.52. In the near term, expect Catalyst's revenue and earnings to continue ramping up rapidly.
This year, it's commercializing Agamree, a steroid for Duchenne muscular dystrophy (DMD), and sales of its other medicines are expected to continue to grow as well. Over the long term, management will need to repeat the feat of buying appealing medicines or pharmaceutical assets and getting them out the door, and at present, there's no reason to expect that it would struggle to accomplish that task.
2. Recursion Pharmaceuticals
Recursion Pharmaceuticals (NASDAQ: RXRX) does research and development (R&D) to make its own medicines, but there's a lot more to the company than that role. Its claim to fame is its use of artificial intelligence (AI) and vast biomedical data to discover and exploit leads for new drugs, especially for rare diseases. While it doesn't have any product in the market yet, or even in late-stage clinical trials, it has other avenues for generating revenue.
Due to its AI platform, many larger biopharma businesses are interested in collaborating with Recursion, paying out big milestone payments as well as potential royalties for any completed drugs resulting from the team-up. The appeal for collaborators, like the German pharma giant Bayer, is to potentially reduce their R&D expenditures as well as their development timelines.
Similarly, Recursion aims to offer licenses to its platform to any other customers, even in the absence of a formal collaboration agreement. Between licenses and formal collaborations, it brought in revenue of $47 million over the past 12 months.
Recursion isn't yet profitable, and it's unclear when or if it will be. Nonetheless, AI for drug development is going to be a major area of investment in biotech, and this company is one of the leaders in the space. Its reserves of $387 million in cash, equivalents, and short-term investments will likely be enough to tide it over for at least another year, at which point it may need to take out fresh debt to continue building out its platform.
The roadmap to profitability is uncertain, but with a powerful collaborator and three different avenues for making money, Recursion has more than one way to become successful, and the risk-reward benefit is thus favorable for those willing to hold it for the long haul. Just don't bet the farm.
3. Caribou Biosciences
Caribou Biosciences (NASDAQ: CRBU) doesn't yet have any medicines on the market, nor does it have a flashy platform to generate any revenue in the meantime. However, its three cell therapy programs for oncology in phase 1 are among the most sophisticated to exist thanks to the underlying technology they use and the early data from its CB-010 program for treating relapsed or refractory B cell non-Hodgkin lymphoma (r/r B-NHL) look very favorable.
Thanks to Caribou's precision gene-editing work, its cell therapy candidates can be manufactured centrally without the need for patients to donate their own cells to use as the raw material in the manufacturing process. That means they could ultimately be produced at far lower costs than competitors can offer.
Therein lies Caribou's long-term appeal. Aside from serving other biotechs scrambling to license its technology to streamline their own manufacturing processes, it could also approach markets where the sheer scale is too prohibitively large for others to target with cell therapies.
Critically, the Food and Drug Administration (FDA) is already on board with the company's intent to initiate a phase 3 trial of CB-010, which is also its lead program, even while the phase 1 trial is still in progress. In other words, regulators are likely impressed with its early data to the point where they expect the candidate to cruise through its phase 2 trials.
If everything goes as planned, this "early stage" biotech will be doing late-stage clinical trials before the end of this year. And while there's no guarantee that it'll succeed in commercializing anything, it has $338 million in cash in the bank and trailing-12-month operating expenses of only $144 million, so it should have plenty of money for the near-term, too.
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Alex Carchidi has positions in Caribou Biosciences and Catalyst Pharmaceuticals. The Motley Fool has positions in and recommends Caribou Biosciences. The Motley Fool has a disclosure policy.
