Biotech is one of the fastest growing areas in healthcare, and one of the more exciting sectors in the stock market. Here's why three Fool.com contributors are bullish on 10x Genomics (TXG -0.55%), Axsome Therapeutics (AXSM -1.44%), and Doximity (DOCS -1.10%).
Powering the next scientific revolution
Patrick Bafuma (10x Genomics): My favorite biotech powers the one of the biggest developments for molecular biology research since gene sequencing. 10x Genomics sells the machines and associated consumables that allow scientists to look in and around a single cell, referred to as spatial biology. This company's tools give researchers unparalleled insight at unprecedented resolution into the observed cell. That makes 10x Genomics' equipment a necessity for the modern researcher.
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The company has proven resilient, too, powering its way through the coronavirus pandemic. Growing revenue 22% from 2019 to 2020, and 64% from 2020 to 2021, the company reiterated 22% to 28% revenue growth for full-year 2022 on its most recent conference call. That's not bad, considering ongoing coronavirus-related lockdowns in China -- a country that represented 15% of 10x's 2021 revenue, not to mention the first-quarter omicron variant surge. To maintain guidance through those headwinds is rather stunning.
To understand my love for 10x Genomics, let's go back 20 years. At the time, there were other gene sequencing machines available, but Illumina was best-in-breed and there really was no clear second choice for the upcoming genomics revolution. The same goes for 10x in the spatial biology arena. One of its platforms, Visium, has been cited in more publications than any other spatial biology tool. No other method has even half as many citations. Plus, more institutions have published using Visium than using the next three other spatial methods combined.
10x is the clear leader in this emerging industry. So yes, I believe this is an opportunity eerily similar to buying Illumina in the early 2000s -- one in which where investors were rewarded 1,400% for holding Illumina through thick and thin, crushing the 180% gains for the S&P 500. Seeing 10x similarly set up as the leader in its budding field, I'm holding onto my shares for the long haul.
A biotech with enormous upside potential
George Budwell (Axsome Therapeutics): Axsome Therapeutics, a newly minted commercial stage biotech, is my favorite equity in this space for a clear-cut reason. Namely, I think this company has one of the most compelling risk-to-reward ratios within the small-cap biopharmaceutical space, especially over the next three to five years.
As things stand now, Axsome sports one commercial-stage product: Sunosi for excessive daytime sleepiness in adults with narcolepsy, along with four pipeline candidates. The company's near-term growth potential, though, truly revolves around its major depression disorder candidate, AXS-05. AXS-05, if approved, is expected to haul in over $800 million in sales by 2026, according to the Evaluate Pharma.
To put this mid-decade sales projection into the proper context, Axsome's market cap is presently hovering around $1 billion at the time of this writing. In other words, this single drug could quite possibly spark a 300% to perhaps 500% rally in the biotech's shares over the next few years (assuming the market returns to form over this period).
How about the downside risk? This is the part of the story that I find the most intriguing. At this point in the game, it is hard to imagine the Food and Drug Administration flat out rejecting AXS-05 for reasons laid out in detail here.
What's more, Sunosi ought to significantly curtail the company's cash burn rate over the next year or so. So, in a worst case scenario, my hunch (and it's only a hunch) is that Axsome's shares will simply trade sideways over the next 12 months.
Axsome, after all, is already deeply undervalued relative to AXS-05's staggering commercial potential.
Billions will be made as the internet transforms healthcare
Taylor Carmichael (Doximity): I love biotech investing. Even if my investment doesn't pan out, I feel like I'm helping humanity by funding scientific research. If I make any losses in this area, I just think of them as a charitable contribution. And biotech investing is such a high-risk area, you're bound to have some bad ideas. But when you're right, the payout can be huge. My family had a lot of success with investments in Intuitive Surgical and Novavax, and those companies remain favorites of mine. But if I had to pick just one stock in this area, I'd probably go with Doximity.
The company enjoys a $6 billion market cap, so it's not tiny. But there's a sizable runway for growth. Doximity is the strongest internet company in the healthcare space. Doximity already enjoys powerful network effects, with 80% of American doctors (and 90% of med students) on the platform. How valuable is this internet portal for healthcare? I don't know, but it's way bigger than $6 billion.
Right now Doximity has three main profit drivers. It's a job placement portal for doctors, nurses, ambulance drivers, and anybody else looking for work in a hospital. It's also a media company where pharmaceutical companies go to reach all those medical eyeballs. And finally it's a telehealth specialist, where primary care physicians can safely and securely meet with their patients online.
I love this business, with its 44% profit margins and its 66% revenue growth. The only real question is how much do you want to pay for this dominant franchise? Thanks to the tech wreck of 2022, the stock is about as cheap as it's ever been. It's under the initial public offering price. It's a wonderful opportunity to add shares or open a position.
