Looking for stocks with big potential that have been overlooked? There's probably something in the biotech industry right up your alley.
There are so many new biotech stocks hitting the market that plenty of gems slip through the cracks unnoticed. Since the beginning of 2018, around 100 new biopharmaceutical companies have started trading on the Nasdaq exchange, including Kodiak Sciences (KOD 2.98%). Axsome Therapeutics (AXSM 0.27%) is a member of the IPO class of 2015, but this drugmaker still doesn't receive the attention it deserves.
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1. Axsome Therapeutics: Keeping it simple
Rather than developing new drugs, Axsome Therapeutics is trying to improve the activity of popular treatments that have been around for decades. Since Axsome's candidates consist of well-understood drugs that the FDA approved long ago, the company can take advantage of the abbreviated 505(b)(2) pathway. This means the company can use data that someone else produced at great expense to support its own application.
The company's first attempt, AXS-02, is simply a hydrated version of zoledronate disodium, a bone-strengthening treatment for people with osteoporosis and cancer. In early 2018, a phase 3 study with complex regional pain syndrome patients fell apart after an interim analysis, although another phase 3 study for osteoarthritis patients with bone marrow lesions is still crawling along.
The company's lead candidate, AXS-05, is a combination of dextromethorphan (DM), an over-the-counter cough suppressant, and bupropion, a popular antidepressant known to amplify DM's effects. Shares of Axsome began soaring this January, after the company announced surprisingly good results from a phase 2 trial. An impressive 47% of patients with major depressive disorder (MDD) treated with AXS-05 achieved remission, compared with just 16% of patients who took bupropion on its own.
Around 7.1% of U.S. adults experience at least one bout of MDD each year. That's more than enough patients to drive annual AXS-05 sales past $1 billion at its peak, and there could be more on the way. Axsome's running phase 3 studies with AXS-05 and patients with treatment-resistant depression, and agitation associated with Alzheimer's disease.
Axsome's also running a phase 3 study with another combination of well-known drugs for treating migraine headaches called AXS-07. By the end of 2020, we'll know if the company has a second potential blockbuster on its hands.
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2. Kodiak Sciences: Heavier is better
This opportunist is taking advantage of gravity to develop a blindness prevention drug that lasts longer than the competition. Kodiak's lead candidate, KSI-301, is a protein that inhibits vascular endothelial growth factor (VEGF), just like Eylea from Regeneron (REGN -0.84%) and Lucentis from Roche (RHHBY 0.77%). Unlike the competition, Kodiak's KSI-301 is attached to long, heavy chains made of the same innocuous biopolymer used in drug-eluting stents.
Because it's so big and heavy, KSI-301 remains active for months, not weeks. That's important, because nobody enjoys getting needles jabbed in their eyeballs every month.
From an efficacy standpoint, KSI-301 should lead to better outcomes, because today's VEGF inhibitors can dwindle to an ineffective level between appointments. If someone needs to reschedule a later date for a regular injection, there's far less chance that new blood vessels will start forming again.
In the first half of 2019, people afflicted with diabetic macular edema, age-related macular degeneration (AMD), and retinal vein occlusion drove sales of Roche's Lucentis to $928 million. Regeneron recorded a whopping $3.6 billion for sales of Eylea over the same period, and a lot of this revenue could become diverted toward Kodiak Sciences if results of an ongoing phase 3 study line up with those we've already seen.
During a phase 1 trial, 87% of AMD patients treated with KSI-301 were able to go more than three months between injections without suffering further loss of vision. Some go longer between injections, but Eylea and Lucentis need to be applied every four weeks.
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In the bargain bin
In 2019, shares of Kodiak Sciences, and Axsome Therapeutics have soared 202%, and 731%, respectively. Despite the enormous gains already produced, Kodiak's market cap is still just $791 million, and Axsome's has risen just a bit further to $806 million.
Axsome's potential new depression treatment could produce annual sales above $1 billion in a few short years. If Regeneron's success with Eylea is any indication, Kodiak's macular degeneration treatment candidate could also boast 10-figure annual sales at its peak.
Biotech stocks tend to trade at mid-single-digit multiples of top-line revenue, which means phase 3 results that fall in line with previous observations could make these stocks multibaggers within several years. Of course, there's plenty that can go wrong along the way, but both stocks are worth the risk.
