Growth stocks are an essential component of any well-rounded portfolio. However, it’s become increasingly difficult to find growth stocks trading at reasonable valuations in this aging bull market.
Even so, I think there are still some attractive bargains available. Within the scorching-hot biotech space, for instance, I’m considering buying shares of Intercept Pharmaceuticals (NASDAQ: ICPT) and Sangamo Therapeutics (NASDAQ: SGMO) soon. Here’s why.
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Time for a rebound
Intercept Pharmaceuticals ended 2017 on a sour note by losing nearly half of its value. The catalyst? Intercept’s FDA-approved primary biliary cholangitis (PBC) drug, Ocaliva, was reportedly associated with the deaths of a handful of patients due to incorrect dosing by physicians. As a result, investors were concerned that regulators would slap the drug with a highly restrictive “black box” warning label that could, in turn, drastically reduce its commercial opportunity in far more lucrative indications like nonalcoholic steatohepatitis (NASH).
Where do things stand now? The bad news is that FDA did tack on a black-box warning to Ocaliva’s label early last month. However, this regulatory setback does have a silver lining: The updated label simply cautions physicians against overdosing and recommends closer monitoring of patients taking the drug. So, Ocaliva won’t be relegated to a treatment of last resort in non-viral liver diseases — meaning that it still has a realistic shot at transforming into a megablockbuster product if its ongoing phase 3 NASH trial pans out.
That doesn’t mean that Intercept doesn’t have other pressing issues, however. The company, after all, reported a staggering annual net loss of $360.4 million for 2017. While it can probably get through the bulk of this year without having to resort to a secondary offering, the cold, hard truth is that Intercept is arguably another two years away from being a cash-flow positive operation.
So if you’re buying this stock now, you should do so with the understanding that Intercept’s shares may not move all that much until Ocaliva’s NASH trial reads out in the first half of 2019. Having said that, Intercept should turn out to be a great bargain at current levels if Ocaliva becomes the gold standard in NASH.
A novel gene-editing play
Genome-based therapies are finally becoming reality, and Sangamo Therapeutics appears primed to be a major player in this emerging field. The lowdown is that Sangamo’s zinc finger nuclease gene-editing platform has recently attracted the attention of industry heavyweights like Pfizer, Gilead Sciences (NASDAQ: GILD), and Shire plc.
That’s certainly an interesting development because Sangamo’s older gene-editing platform was widely expected to fall off the map due to the introduction of more user-friendly and far cheaper systems like CRISPR/Cas9 and TALENs. This flurry of high-dollar licensing deals with the top players in rare diseases and cancer, however, strongly suggests otherwise.
What should investors be on the lookout for? Gilead’s recent $3.15 billion research partnership with Sangamo to develop next-generation off-the-shelf CAR-T therapies could very well turn out to be a prelude to a full-on tender offer within the next two to three years. Gilead, after all, is investing heavily in CAR-T technology right now, and the biotech has earmarked Sangamo’s gene-editing platform as its primary means to gain a key competitive advantage in this crowded space.
Gilead could have stiff competition for Sangamo from other recent licensees like Pfizer, however. Pfizer is angling to become a leader in the treatment of rare diseases like hemophilia and amyotrophic lateral sclerosis, so it’s probably not going to allow Gilead to gobble up one of its key development partners without a fight.
Time to buy?
Intercept and Sangamo arguably both have extremely bright outlooks. Intercept has the assets in place to become a leader in the fight against non-viral liver diseases — a market worth tens of billions in annual sales. Sangamo has somehow leapfrogged past the latest competition to become the top gene-editing company right now.
So while these somewhat speculative growth stocks may take a while to bear fruit, I do like their chances at eventually generating sizable returns on capital, and that’s why I’m strongly considering adding them to my portfolio soon.
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George Budwell owns shares of Pfizer. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has the following options: short May 2018 $85 calls on Gilead Sciences. The Motley Fool recommends Shire. The Motley Fool has a disclosure policy.
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