A brain cancer treatment…a next-generation cholesterol drug…and gene therapy that reengineers the body’s own immune system to attack cancerous tumors. These are just a few of the potential breakthroughs from small biotechnology companies that you can invest in. But to do so, you must be willing to endure the risks that come with betting on complex science, clinical trial results and Food and Drug Administration (FDA) decisions.

Bottom Line Personal asked leading biotech stock picker John McCamant whether this is a good time to invest in the industry and how to spot the most likely future blockbusters now…

Benefiting from an Attractive Environment

We may be in the most favorable regulatory environment—meaning, looser regulations—that biotech has ever seen. Of course, this has raised concerns about consumer safety, but for investors there’s no doubt that it makes biotech stocks more attractive.

There is a mandate to drastically cut review time for new drugs and therapies to get them to market faster. In 2017, the FDA issued 46 approvals, the most in two decades, and that trend is likely to continue for years.

At the same time, large pharmaceutical companies—flush with billions of dollars in cash from corporate tax cuts—are rushing to replenish their pipelines by partnering with small biotech firms or buying them outright at prices much higher than their current stock prices.

My Key Criteria

There are more than 450 biotech stocks currently trading on US stock exchanges. To identify those with the greatest investment potential, I focus on four criteria…

A drug or other therapy in clinical ­trials. The FDA requires biotech firms to navigate a three-phase testing process to demonstrate a drug’s safety and effectiveness. The sweet spot for a company’s stock is in late-stage trials before the data is submitted for FDA approval. The drug is advanced enough to make an informed bet on its efficacy but a year or two away from becoming a commercial product. And many investors aren’t aware of its full value.

Partnerships with major pharmaceutical companies. Biotech firms often fail because they run out of money, not because their science lacks potential. Funding from Big Pharma confirms for me that a stock is worth investing in. Once a drug is approved, the marketing and distribution power of a pharmaceutical giant can be essential to its success.

Seasoned management. Many biotech CEOs are brilliant scientists. That’s not enough. I look for leaders who have developed successful commercial products in the past and who can navigate the treacherous process of overseeing drug development and raising and allocating cash.

Big potential markets. That means companies tackling chronic or life-threatening illnesses with treatments that will fill an unmet medical need and that government and private insurers would be willing to pay for.

Below, I have highlighted four of today’s most promising treatment niches, as well as five attractive companies in those areas that meet the above criteria, including that they have a drug or other treatment in phase III clinical trials. The prices of some of these companies’ stocks have dropped sharply over the past year because, in my opinion, investors are underestimating the value of their breakthrough treatments, making investing even more attractive. The stock prices of others have soared on highly positive test results, but it’s not too late to invest because there still is potential for much more appreciation.

Cholesterol-Lowering Drugs

About one-fifth of Americans between ages 40 and 75 take statin drugs, such as Lipitor, that reduce the amount of cholesterol in the blood, a leading cause of coronary heart disease. But for tens of millions of patients, statin drugs aren’t effective either because they can’t reduce cholesterol enough or they cause debilitating muscle pain as a side effect. My favorite companies that have other cholesterol-fighting drugs…

Esperion Therapeutics (ESPR). Roger Newton, PhD, the scientist who developed the blockbuster cholesterol drug Lipitor more than a decade ago, is the founder of this company, which is currently testing a nonstatin cholesterol-lowering drug called bempedoic acid. It works similarly to Lipitor with one important difference—it remains inactive until it reaches the liver (where most cholesterol is produced), which should allow it to avoid causing troublesome side effects. The stock price plunged more than 30% in one day in early May due to patient deaths in a phase III clinical trial, but investors overreacted. I believe that the trial results were still well within the safety standards required by the FDA and should not delay the drug’s commercial approval in 2019.

The Medicines Co. (MDCO) has a drug called inclisiran that boosts the liver’s ability to absorb cholesterol by turning off genes that produce a protein called PCSK9. Inclisiran has several advantages over competing PCSK9 inhibitors already on the market. It requires only two shots a year and is projected to cost $5,000 annually versus competitors’ typical 12 to 24 injections a year with a price tag typically several thousand dollars higher.

Brain Cancer Treatments

About 700,000 people in the US are ­afflicted with brain tumors. Malignant tumors are difficult to treat because surgery can be too dangerous, and radiation and chemotherapy often suppress the cancer only temporarily. For instance, half of all patients with glioblastomas—tumors that form on the supportive tissue of the brain—die within nine months. That’s the form of brain cancer that Senator John McCain has been treated for and that both Ted Kennedy and former vice president Joe Biden’s son died from. My favorite company with a brain cancer treatment…

Ziopharm Oncology (ZIOP) uses gene therapy to battle cancer by injecting interleukin-12 (IL-12)—a protein made by white blood cells—directly into tumors. IL-12 stimulates genes in tumors to inhibit growth and block the formation of new blood vessels. The treatment has proved so effective that the FDA allowed the company to skip phase II clinical trials and go right into phase III for malignant brain tumors. The company also is testing a gene therapy, which removes some of a ­patient’s T-cells—white blood cells that attack disease-causing antigens—and modifies them to target particular cancer cells in solid tumors and then reintroduces them into the patient’s bloodstream.

Hormonal Disease Treatments

Every year, more than 200,000 women undergo hysterectomy in the US for uterine fibroids. Millions more suffer from heavy menstrual bleeding from these fibroids, which occur in about 80% of women age 50 and over. My favorite company with a hormonal disease treatment…

Myovant Sciences (MYOV) is developing Relugolix, a once-daily pill that rapidly reduces levels of estrogen and progesterone in women and reduces levels of testosterone in men. Relugolix is being tested for reducing menstrual bleeding associated with uterine fibroids…lessening endometriosis-associated pain…and slowing advanced prostate cancer in men.

Chronic Pain Management

About two million people in the US are addicted to prescription opioids, which dull the perception of pain and create intense euphoric feelings that often lead to addiction and abuse. My favorite company with a pain-management drug…

Nektar Therapeutics (NKTR) has developed a novel oral opioid for patients with severe back pain that is about to be submitted for FDA approval. Known as NKTR-181, it selectively targets pain without inducing euphoria and dramatically reduces addiction risk. There is a big movement in the country to fight opioid addiction, and this new drug addresses that problem. Nektar’s stock rose more than 300% in the past year, but it could go much higher because NKTR-181 could win a sizable chunk of the more than $20 billion a year pain-management market.

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