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2 Biotech Stocks I Wouldn't Touch With a Broom

By Cory Renauer – Updated Sep 21, 2019 at 12:18PM

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Here's why shares of these drugmakers have a very slim chance to provide anything but losses.

Drug development is a losing game full of highly trained professionals who would rather be lucky than talented at their jobs. This is because experimental new drugs fail so frequently that an entire career without one successful new drug discovery under their belts isn't uncommon.

Doing everything right doesn't guarantee success in this business, but there are signs of trouble that can make the long odds much longer. These two biotech stocks have been flashing signals that should make any investor too nervous to pull the trigger.  

Company (Symbol) Annualized Net Loss Accumulated Deficit  Recent Market Cap
Denali Therapeutics (DNLI 1.14%) ($231 million) $325.3 million $1.79 billion
Geron (GERN 1.28%) ($57 million) $1.04 billion $268 million

Data source: Yahoo! Finance and company filings.

Denali Therapeutics: Please remain patient

This early clinical-stage biotech is developing potential first-in-class drugs for large patient groups that really need new treatment options. The company's receptor-interacting protein kinase-1 (RIPK1) inhibitor, DNL747, could become a new treatment for amyotrophic lateral sclerosis (ALS), Alzheimer's disease, and multiple sclerosis.

Hundred dollar bill on fire.

Image source: Getty Images.

Runaway RIPK1 activity also plays a roll in auto-immune disorders beyond the central nervous system, like psoriasis and rheumatoid arthritis. To this end, Denali Therapeutics is developing another RIPK1 inhibitor that doesn't cross the blood-brain barrier, called DNL758.

Last year, Sanofi (SNY 3.08%) inked a deal with Denali to split development costs and potential sales if either RIPK1 inhibitor can make it that far. In animal studies, DNL747 and DNL758 appear to provide a benefit, but Denali and Sanofi haven't provided any human proof-of-concept data yet.

Here's a good rule of thumb to follow if you're new to investing in biotech stocks: Never buy anything chained to first-in-class new drug candidates before seeing some evidence those candidates work in real patients. Last November, Denali showed investors proof that DNL747 can inhibit RIPK1 activity in healthy volunteers, but we're still waiting for results of a study that began in January to see if that activity can slow the pace of disease progression for any patients with ALS. 

Denali's also developing DNL201, which inhibits a protein associated with Parkinson's disease called LRRK2. The company began DNL201's first clinical trial with Parkinson's disease patients last December. Results from this small 28-day human proof-of-concept trial with DNL201 and a few more with DNL747 are expected in the fourth quarter of 2019.

Denali's not necessarily doing anything wrong; it's just trying to do something really difficult. We don't understand neurological disorders nearly as well as we'd like to, which makes developing new drugs to treat them riskier than betting on the Detroit Lions to remain undefeated this season. Clear evidence the company's new drug candidates work as hoped could send Denali shares higher, but the far-more-likely scenario could lead to swift and heavy losses.

Man in a suit watching money fly out of his pocket and into a hole in the floor.

Image source: Getty Images.

2. Geron: Never giving up

Geron has been developing telomerase inhibitors for the treatment of cancer since forming in 1990 and doesn't have a lot to show for it except an enormous accumulated deficit and a lifetime membership in the billion-burned club. Telomeres are repeating nucleotide sequences at the ends of chromosomes that chain all 23 of them together and get shorter each time cells divide before they eventually have to stop. Telomerase is an enzyme that lengthens telomere strands, and excessive telomerase activity is strongly associated with cancer progression. 

Geron tried developing several types of drugs to inhibit telomerase and control tumor growth, including cancer vaccines and gene therapies, before finally settling for an oligonucleotide that reduces telomerase activity called imetelstat in early 2006.  

At first, Geron tried to develop imetelstat for leukemia patients but didn't get past phase 2 testing before shifting gears. Since then, imetelstat has produced unremarkable results from phase 2 trials with patients who have multiple myeloma, breast cancer, ovarian cancer, lung cancer, gastrointestinal stromal tumors, and more. 

For the past several years, Geron has been aiming imetelstat directly at a family of blood-based malignancies called myelodysplastic syndromes and myelofibrosis. While there were some early hints of success, Geron's big pharma partner Johnson & Johnson walked away from an option to finish developing imetelstat after interim results from an ongoing trial failed to impress.

No potential development partners have stepped up since J&J lost interest in imetelstat, so Geron's going to handle phase 3 expenses on its own. Drug-development expenses accelerate as new drug candidates approach the finish line, which means we won't know if imetelstat has any future until after Geron's $152 million cash balance has been wiped out.  

Sad man watching his money fly away.

Image source: Getty Images.

A common theme

Denali Therapeutics hasn't proven its drugs will work in humans, either, but at least Denali doesn't have a decades-long track record of failure. It's rare, but not unheard of, to see oncology drugs succeed in the real world after one or two clinical trial mishaps.

Unfortunately, there are heaps of biotechs that continue along paths that lead to near-certain failure at the expense of shareholders. If any of today's successful cancer drugs have a track record half as long as imetelstat's, though, I've never heard about it. 

Cory Renauer owns shares of Johnson & Johnson. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Geron Corporation Stock Quote
Geron Corporation
GERN
$2.37 (1.28%) $0.03
Denali Therapeutics Inc. Stock Quote
Denali Therapeutics Inc.
DNLI
$31.04 (1.14%) $0.35
Sanofi Stock Quote
Sanofi
SNY
$39.19 (3.08%) $1.17
Johnson & Johnson Stock Quote
Johnson & Johnson
JNJ
$163.20 (%)

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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