Over the next 10 to 20 years, some of healthcare’s most impactful innovations will come from biotechnology companies. They’ll produce medicines based on living organisms that will save and improve the lives of millions of patients with a wide range of diseases.
The high growth potential of biotech stocks brings many home-run-seeking investors to the Nasdaq Biotechnology Index. Here there are more than 170 companies to choose from, each with their own focus and expertise.
Of course, with the prospect for substantial return comes substantial risk. Drug trials carry tremendous uncertainty. The Food & Drug Administration (FDA) imposes many regulations and decisions that amplify this uncertainty.
The investor must embrace volatility when taking on a biotech stock. Same goes with patience as biotech products can take years if not decades to generate revenue. Most never make it to market.
One way to limit the risk is to gravitate towards more established biotech companies that have successfully brought a drug to market or are close to doing so. Partnerships with reputable peers also adds value.
Typically, such companies command higher market capitalizations. Yet the Nasdaq Biotechnology Index consists primarily of small- and micro-caps. Roughly one-third are penny stocks. Filtering out both of these categories leaves several ‘less risky’ options.
Wall Street research groups say these three mid-cap biotechs have 2x potential. It’s for the investor to decide if the upside justifies the risk.
What Makes Intellia Therapeutics an Attractive Stock?
Intellia Therapeutics, Inc. (NASDAQ: NTLA) is a clinical-stage biotech focused on genome editing. The company uses the highly touted CRISPR technology to develop therapies for cancer and other diseases. While it has yet to bring a product to market, Intellia Therapeutics has several promising candidates. Its best-known candidate is NTLA-2001, a potential treatment for a heart disease known as ATTR amyloidosis. NTLA-2001 is being developed alongside Regeneron Pharmaceuticals for other indications as well and progressing in early clinical studies.
Intellia has also teamed up with Regeneron to develop drugs for hemophilia. The collaboration with one of the world’s largest biotechs is the most compelling part of investing in Intellia. It gives the company access to resources it couldn’t afford on its own — and the credibility linked to Regeneron blockbusters like Dupixient and EYLEA.
This is a big part of why the consensus price target on Intellia shares ($88) implies more than 100% upside. Last month, Stifel Nicholas offered a Street-high target of $131 that points to a possible 3x return.
Why Does Wall Street Love Denali Therapeutics?
Denali Therapeutics, Inc. (NASDAQ: DNLI) specializes in therapies for neurodegenerative diseases that can cross the blood-brain barrier. Its portfolio includes five programs that have reached the clinical stage. Candidates for treating Parkinson’s disease, ALS, Hunter syndrome and other neurological conditions make up a robust pipeline. Although Denali Therapeutics does not yet have a commercialized drug, there are two reasons to like the stock.
First, partnering with Biogen to develop a Parkinson’s disease treatment holds tremendous potential. Data around DNL151 has been encouraging, and the companies are moving toward starting late-stage trials. Denali has received an equity investment from Biogen and will receive more than $1 billion if certain milestones are met.
Second, the FDA granted Denali’s candidate for Hunter’s syndrome, DNL310, the Fast Track designation. Patients are being recruited for a phase II/III study, which could lead to product registration if successful.
Denali’s lack of meaningful revenue shouldn’t be a deterrent, not just because its pipeline is progressing. The company boasts one of the strongest balance sheets in the biotech space with a $1.1 billion cash position and no debt. This is one of the Street’s favorite biotech stocks, and the $61 average target equates to a two-bagger.
What Is the Upside for Zai Lab Stock?
Zai Lab Ltd. (NASDAQ:ZLAB) is also very popular among analysts as evidenced by the unanimous buy rating. An average target price of $92 means the stock could gain by nearly 150% over the next 12 months.
Based in China, Zai Lab is developing medicines for autoimmune and neurological disorders, infectious diseases and cancer. The company’s broad scope could be looked at in two ways: 1) the lack of specialization makes it harder to get behind or 2) the diversification improves the odds of commercial success.
Wall Street is siding toward the latter view because Zai Lab’s pipeline is approaching a breakout point. Approximately 80% of its therapeutics programs are past the ‘proof-of-concept’ phase. The company expects to launch at least eight products over the next three years, several of which could be blockbusters.
Positive readouts in pivotal Phase 3 studies of Efgartigimod for immune thrombocytopenia (ITP), TTFields for non-small cell lung cancer (NSCLC) and KarXT for schizophrenia hold big treatment and revenue potential.