The best-performing healthcare stocks typically receive little to no fanfare until after they've already made a monstrous move upward. Many fly under the radar before reaching a major value-creating event, such as a pivotal clinical or regulatory catalyst.
With this theme in mind, we asked our contributors which healthcare stocks with potential for a sizable run higher are being overlooked. They suggested Jounce Therapeutics (JNCE), Lexicon Pharmaceuticals (LXRX 1.23%), and Paratek Pharmaceuticals (PRTK). Read on to find out why.
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Invest in the next generation of immunotherapies
George Budwell (Jounce Therapeutics): This small-cap cancer immunotherapy company is a name that might not be familiar to even the most seasoned of biotech investors. Jounce, after all, only went public at the start of 2017. However, this newcomer does offer a unique value proposition worth checking out.
The big-ticket item is Jounce's collaboration agreement with biotech heavyweight Celgene (CELG) for the development and commercialization of cancer immunotherapies. Jounce received $225 million in upfront cash, along with a $36 million equity investment from Celgene, as part of this deal. In return, Celgene gained access to Jounce's lead product candidate, JTX-2011, as well as additional earlier-stage assets. JTX-2011 is an inducible T-cell co-stimulator (ICOS) that's currently in a combined phase 1/2 trial for solid tumors.
What makes Jounce unique? Jounce's core thesis is to use its ICOS platform in combination with PD-1 checkpoint inhibitors such as Bristol-Myers Squibb's Opdivo to ramp up the response rates in patients who express the ICOS checkpoint protein on circulating T cells. By doing so, the idea is to block a tumor's ability to evade immune detection, while simultaneously gearing up a targeted immune response to the tumor in question.
Now, Jounce is still quite a way removed from producing a commercial-stage product, and it's going to arguably need Celgene to opt in, as agreed, following certain clinical milestones to avoid heavy levels of dilution. But Celgene has shown a commitment to its external R&D partners in the past -- even in the face of adversity -- because of its rigorous search for differentiated oncology products. And Jounce definitely has a top-notch R&D platform that could provide Celgene with a clear-cut competitive edge.
A breakthrough diabetes drug could be less than two years away
Sean Williams (Lexicon Pharmaceuticals): Generally, healthcare investors don't think of clinical-stage biotech companies as "top stocks," but the data has been so impressive thus far with Lexicon Pharmaceuticals' sotagliflozin that I'd suggest it's an under-the-radar healthcare stock worth a closer look.
Sotagliflozin is an experimental oral medication designed to treat type 1 and type 2 diabetes. Next-generation SGLT-2 inhibitors that work in the kidneys by blocking glucose absorption hit the market in 2013, and they've been very successful. Lexicon's sotagliflozin is a dual inhibitor of SGLT-1 and SGLT-2, meaning it blocks the absorption of glucose in the kidneys (SGLT-2) and intestines (SGLT-1). The idea behind the drug is that focusing on both SGLT-inhibitors could provide improved glycemic balance. And since SGLT-2 drugs are also known to lead to lower systolic blood pressure and weight loss as side effects, the hope is sotagliflozin will be just as good, if not better, with regard to these "side effects."
In clinical studies, sotagliflozin has been as impressive as expected. Last September, Lexicon announced that its drug had met its primary endpoint in a type 1 diabetes late-stage study (type 1 diabetes accounts for about 1.25 million out of approximately 29 million diabetes cases in the U.S.). Top-line results showed a 0.43% A1C reduction from baseline with the once-daily 200 mg dose after 24 weeks of treatment, and a 0.49% A1C reduction with the 400 mg once-daily dose over the same timeframe. Comparatively, the placebo led to just a 0.08% A1C reduction over 24 weeks from baseline.
Mid-stage promise for the drug was so good that Sanofi (SNY 2.00%) latched on to Lexicon's drug with a very large licensing deal in November 2015. The deal is worth up to $1.7 billion and included a bountiful $300 million upfront to Lexicon. The remaining $1.4 billion is based on development, regulatory, and sales-based milestones. More importantly, Sanofi is handling the type 2 diabetes late-stage studies, with Lexicon only on the line for up to an aggregate of $100 million in type 2 diabetes development costs through 2018. And, of course, Lexicon receives a healthy double-digit tiered royalty based on net sales.
If sotagliflozin remains on track for success, it could be generating well over $1.50 in full-year EPS by as soon as 2020 on more than $450 million in sales, according to Wall Street. This would make its current valuation quite the bargain. If you're looking for an under-the-radar healthcare stock, Lexicon Pharmaceuticals is worth a closer look.
Are next generation antibiotics finally here?
Brian Feroldi (Paratek Pharmaceuticals): Antibiotic-resistant bacteria are a huge threat to public health, creating a dire need for new treatment options. One small-cap biotech that looks to have a better than average shot of bringing a solution to market is Paratek Pharmaceuticals. In its 774-patient phase 3 study that tested the safety and efficacy of its next-generation antibiotic drug candidate, omadacycline, in treating community-acquired bacterial pneumonia, the drug met all of the study's endpoints and was shown to be safe and well tolerated. The outcome hints that the company might have a winner on its hands, and current plans call for the drug to be in regulators' hands by early 2018.
As exciting as omadacycline looks, it's also nice to know that Paratek isn't pinning all its hopes on one drug. Sarecycline is in development with pharma giant Allergan as a treatment for severe acne. The drug produced impressive phase 3 results recently, and the two companies plan on sending it off for FDA approval later this year.
While it's hard to handicap the company's odds of success, I like that Paratek offers investors two shots on goal within the next 18 months. In addition, some analysts believe omadacycline could reach blockbuster status if it can win the regulatory nod. With Paratek's market cap currently hovering around $550 million, there looks to be plenty of upside potential if everything works out.
