Investing in biopharma companies is a high-risk/high-reward approach that makes millionaires out of average investors, but it can also turn a promising investment into a truly undesirable portfolio holding. If revenue is not yet being generated from products, a company's stock price can rely heavily on positive news from treatment candidates moving through clinical trials. 

NGM Biopharmaceuticals (NGM) has had a few ups and downs in its clinical trials in 2021, leading to fluctuations in stock price. There was also an overall market decline in September, and it has dropped by 23% over the past three weeks, while its latest news has been positive. This could be the setup for an excellent opportunity to buy on the dip.

bio pharma lab technician working in lab

Image source: Getty Images.

Does NGM have what it takes to go the distance?

NGM is a biologics discovery engine focusing on a portfolio of seven programs involving antibody candidates to treat diseases in three primary categories: cancer, retinal, and liver and metabolic. Four studies are currently in phase 2 trials, while the remaining three are in phase 1 or set to enter it in the first half of 2022.

One of the more promising studies involves NGM120 -- an antagonist antibody for use in the treatment of patients suffering from metastatic pancreatic cancer. This antibody is currently in phase 2 clinical trials. In a study of six patients with metastatic pancreatic cancer, NGM120 has shown to be well tolerated and to have no dose-limiting toxicities, findings that pave the way for additional studies.

A second promising study, for which NGM has support from Merck (MRK -1.22%), is in the retinal space and is also in phase 2. NGM621, a monoclonal antibody, is being studied for the treatment of geographic atrophy (GA) -- age-related advanced macular degeneration affecting eyesight -- which can lead to a total loss of vision, impacting primarily people of age 65. Unfortunately, there are no currently approved treatments, but that means NGM could be the first to discover a treatment and to bring it to market through its collaboration with Merck.

Researchers for the NGM621 phase 1 studies concluded that the treatment was well-tolerated, providing support for further development. The company anticipates that top-line data from the NGM621 phase 2 study will be available in the second half of 2022, at which time Merck will have a one-time option to license NGM621. If it does, that could result in NGM receiving milestone payments and double-digit royalties. 

Analysts ratings remain strong as price targets sway

In May, analysts at Raymond James and Piper Sandler cut price targets for NGM to $22 and $20 respectively, due to disappointing results from phase 3 trials of aldefermin as a treatment for liver disease. The analysts expected better results based on previous phases. But even with a price cut and one of the analysts lowering their rating on the company, both remained positive with an overweight rating. However, that was not enough to keep the stock price afloat, as it tanked by 41%.

By August, positive news was once again flowing from the company in the form of its second-quarter earnings report, which highlighted its progress in clinical studies including the 320-patient phase 2 study of NGM621. The report also highlighted the continued enrollment of patients by Merck for the MK-3655 study for the treatment of liver disease. As with the collaboration on NGM621, Merck has an arrangement in which NGM can receive milestone payments and royalties upon proof of concept. If NGM chooses not to receive these payments, it will share in a global cost and revenue arrangement of up to 50% for MK-3655.

The company reported a quarterly increase in net loss of 44% over the same period last year, which was partially caused by a year-over-year decrease in revenue of $3 million for the quarter. A rise in research and development expenses and selling, general, and administrative expenses also contributed to the net loss, primarily related to ongoing studies of NGM621 and NGM120. 

Although expenses are climbing with revenue remaining close to level year over year, the company is benefiting from a rise in cash and equivalents. In December 2020, cash stood at $295 million, but it has since grown to $390 million as of June 30, 2021. The company is also benefiting from an expected $120 million from Merck toward R&D expenses through 2024, in addition to the potential license option payments from Merck.

Data highlighted in the second-quarter results led to a revised upward price target from analysts to $39, along with a double rating boost, from outperform to strong buy. Positive news coming from phase 3 data from competitor Apellis Pharmaceuticals (APLS 2.34%) for its own GA treatment, contributed to NGM's overall rating. Since Apellis' evidence makes the larger GA market accessible to companies, this allows NGM's research to appear even more promising. 

Should you buy the dip?

All things considered, including news from studies combined with market volatility, NGM looks well-positioned to continue with clinical trials that could lead to treatments for debilitating diseases. The company's cash position and well-rounded pipeline provide an added benefit of being able to withstand a bit of uncertainty in the market and potential setbacks during trials.

The current analyst average 12-month price target sits at $35, with a low of $30 and a high of $39. The average target represents a 75% premium above the current price of $20, and at the lowest of the targets, it still represents a potential 50% gain. Based on the positives shown so far and the support of analysts at Raymond James (strong buy rating) and B. Riley Financial (buy rating) -- the drop in stock price provides a good opportunity for investors to buy this company that could be a major player for years to come.