I've been thinking about biotech stocks a great deal lately. The sector seems to be trading much better in the early weeks of 2012, with
a few spectacular gainers already in the bag and likely more to come.
Yet investors are also well aware many biotech stocks simply flame out as cash dwindles or as a drug fails to meet clinical testing hurdles. So how do you gain potentially big upside without suffering significant downside (which is my entire $100,000 Portfolio mission) in this speculative sector?
I think I've found the perfect vehicle.
It's a company with ties to a range of promising drugs and only needs to see a few hits to give its shares a solid boost. I'm talking about Ligand Pharmaceuticals (Nasdaq: LGND), which has been around for more than 20 years. After a major revamp about five years ago, the company is just now hitting its stride.
Just-released fourth-quarter results underscore a long-awaited milestone. Ligand had been losing money because its portfolio of drugs had yet to mature, but now it's finally profitable -- and potentially hugely profitable within a few years.
Before I get into Ligand's slate of investments, let me show you what this company has looked like by the numbers.
As you can see in the table above, Ligand's heavy investments to acquire the rights to promising drugs have led to a string of money-losing years. EBITDA is the more salient metric than earnings per share (EPS), because it best highlights an ongoing cash burn. Not only did Ligand sharply reduce the EBITDA drain in 2011, it actually delivered positive EBITDA in the fourth quarter -- for the first time in a number of years. And now that Ligand is in the black, it's highly unlikely to slip back into the red.
Credit for this company's coming turnaround goes to CEO John Higgins, who took the reins in January 2007. Since then, he has deployed the company's cash into four key deals, which have provided a pipeline of drugs, and more important, some key biotechnology platforms that can boost the efficacy and safety of many other companies' drugs.
Reaping what they sow
Through its investment in various small biotech firms, Ligand now has exposure to 60 different drugs that are either in clinical trials or are already on the market.