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Biotech Fire Sale: 2 Top Stocks to Buy Next Week

By George Budwell - Apr 8, 2018 at 8:56AM

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Shares of Jounce Therapeutics and Sangamo Therapeutics were both hit hard last week by the marketwide sell-off. This dip is likely to prove temporary in both cases, however.

Biotech stocks took it on the chin last week, thanks to President Trump's trade war with China, as well as the high-profile clinical failure of Incyte Corp. and Merck's late-stage combination therapy for advanced melanoma. In short, these two events sparked a wave of risk avoidance behavior among investors, which is always a negative catalyst for biotech stocks in general. 

That being said, this widespread sell-off has arguably created some truly enticing buying opportunities for investors with a high tolerance for risk. Former highfliers like Jounce Therapeutics (JNCE 0.00%) and Sangamo Therapeutics (SGMO -5.03%), for example, finally pulled back from their stately 52-week highs and now appear to be attractive buys heading into next week. Here's why.   

A finger pressing a blue button on a computer keyboard with the words Buy Now on it.

Image Source: Getty Images.

A buyout in the making

Jounce Therapeutics is an under-the-radar immuno-oncology company that's collaborating with biotech blue blood Celgene Corp. (CELG) to develop novel therapies for a range of solid tumors.

The quick-and dirty version of the story is that Jounce is initially co-developing, JTX-2011, with Celgene as a potential treatment for multiple solid tumor types that have either shown low response levels to PD-1 inhibitors, or that have yet to be targeted as prime PD-1 inhibitor candidates.

JTX-2011 is a monoclonal antibody that targets the Inducible T cell CO-Stimulator (ICOS) protein on the cell surface of T cells, which is believed to be a powerful way to boost immune responses to cancerous cells. The drug is presently being assessed in a mid-stage study as both a monotherapy and as part of combination treatment with Bristol-Myers Squibb's PD-1 inhibitor Opdivo.

Apart from the fact that Jounce is pursuing a novel immuno-oncology agent as its lead therapy, this biotech is also intriguing due to its use of specific biomarkers that should enrich the patient population, whereby leading to more robust clinical trial results. In other words, JTX-2011 is being assessed exclusively in patients that should be amenable to ICOS-based therapies. Preliminary results from this ongoing study are expected by the end of this quarter. 

Why is Jounce a strong buyout candidate? Celgene has already purchased a $36 million equity stake in the company, and future milestone payments stemming from the collaboration could top $2 billion. So it only makes sense that Celgene would forgo these hefty milestone payments if the collaboration proves fruitful, and simply buy Jounce lock, stock, and barrel. 

All things considered, Jounce is still a high-risk play by virtue of its lack of an approved product, but this cutting-edge biotech appears to be headed in the right direction. And after last week's dramatic sell-off, Jounce certainly offers a compelling risk-to-reward ratio.

Get in on the ground floor

Sangamo's stock has been red-hot over the past 12 months due to the growing interest in all-things gene therapy. The backstory is that Sangamo struck a series of licensing deals with biopharma heavyweights Gilead Sciences (GILD 0.24%) and Pfizer (PFE 1.17%) to develop next-generation therapies for cancer and rare diseases like the bleeding disorder hemophilia.  

The Gilead partnership centers around creating adoptive cell therapies that can be manufactured at scale using Sangamo's zinc-finger nuclease (ZFN) gene-editing platform. The current generation of adoptive cell therapies require extensive manufacturing processes that can delay treatment, and create backlogs of patients.

That being said, Gilead's decision to tap Sangamo's ZFN platform did surprise most Wall Street analysts and industry insiders. The consensus was that Gilead would ultimately go the CRISPR route for its gene-editing needs. After all, Sangamo's ZFN platform is more labor-intensive and time-consuming than CRISPR. With serious questions currently swirling around CRISPR's safety in human subjects, however, Sangamo's ZFN tech was apparently the more compelling choice for Gilead at this stage in the game.

The big ticket item for investors here is that this gene-editing deal with Gilead could eventually translate into a whopping $3 billion in total milestone payments for Sangamo -- that is, if things go according to plan. That's a staggering opportunity for a company with a market cap of less than half that amount at present.

Sangamo's severe hemophilia A partnership with Pfizer is also on track to produce preliminary data by mid-year. If successful, this partnership may trigger buyout talks between the two companies. Pfizer, after all, has deep interests in novel treatments for rare diseases, and the biopharma is currently in the process of ramping up its adoptive cell therapy pipeline as well. Put simply, Sangamo would be a near-perfect fit for Pfizer. 

Aside from the possibility of a buyout from one of its partners, Sangamo's deep and robust gene therapy platform also offers up another compelling reason to own this stock right now. Sangamo could run into some bad luck in the clinic, but the sheer breadth of its cutting-edge pipeline should ultimately land the company a commercial-stage product at some point.

So, like its clinical-stage peer Jounce, Sangamo's risk-to-reward ratio is arguably heavily skewed toward the upside as things stand now. The biotech's 10.8% drop last week therefore comes across as an incredible buying opportunity for investors with a long-term mind-set.

 

George Budwell owns shares of Pfizer. The Motley Fool owns shares of and recommends Celgene and Gilead Sciences. The Motley Fool has the following options: short May 2018 $85 calls on Gilead Sciences. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Sangamo Therapeutics Stock Quote
Sangamo Therapeutics
SGMO
$5.67 (-5.03%) $0.30
Jounce Therapeutics Stock Quote
Jounce Therapeutics
JNCE
$4.65 (0.00%) $0.00
Pfizer Inc. Stock Quote
Pfizer Inc.
PFE
$49.15 (1.17%) $0.57
Gilead Sciences, Inc. Stock Quote
Gilead Sciences, Inc.
GILD
$65.34 (0.24%) $0.16
Celgene Corporation Stock Quote
Celgene Corporation
CELG

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