Biotech stocks are in a slump. Despite numerous wins in the high-profile areas of COVID-19 and cancer therapy, the industry has failed to excite investors this year -- as seen in the 12% year-to-date fall in the the bellwether SPDR S&P Biotech ETF. Risk-tolerant growth investors appear to be favoring other vehicles over biotech in 2021, such as the red-hot cryptocurrency Shiba Inu (SHIB 0.09%), electric-vehicle giant Tesla (TSLA +3.93%), and emerging social media plays such as Digital World Acquisition (DWAC +0.00%) and Phunware (PHUN 0.99%).
The reason for this broad shift in investor sentiment? The Shiba Inu coin has produced life-altering gains for investors in just the past 14 months, Tesla's shares have risen by over 1,600% in the past three years, and the Donald Trump-associated social media plays Digital World Acquisition and Phunware have both gone parabolic in the past week alone. Topping it off, several biotech companies have been hit with the bad-news bug this year.
For instance, Atea Pharmaceuticals (AVIR 1.99%), Agenus (AGEN +1.87%), Novavax (NVAX +9.53%), and Ocular Therapeutix (OCUL 0.31%) were all stung by bad news last week, causing their shares to crater. However, biotech stocks can rebound quickly after bad news. Should growth-oriented investors consider buying these beaten-down biotech stocks next week? Let's take a deeper dive to find out.
Image source: Getty Images.
Atea Pharmaceuticals: Has max pain been reached?
Atea's shares crumbled last week after its Roche-partnered direct-acting antiviral pill, AT-527, flopped in a phase 2 trial for patients with mild or moderate cases of COVID-19. The back story is that AT-527 was on track to possibly become a megablockbuster orally administered treatment for COVID-19. That investing thesis isn't completely off the table, as the drug is still making its way through a pivotal trial. Moreover, Atea and Roche are reportedly adding more high-risk COVID-19 patients with underlying health conditions to this ongoing phase 3 trial, which ought to boost the drug's chances of success. But that all-important data readout is now expected to be delayed by up to six months.
Can Atea's shares rebound? I think there's a reasonable chance that this small-cap biotech could indeed rebound in the weeks and months to come. The failed phase 2 trial for AT-527 contained both vaccinated patients and patients with milder forms of the disease. What's more, the drug did reportedly show a clinical benefit in higher-risk patients. The bad news is that Atea and Roche's oral COVID-19 pill would probably be the third one on the market if this phase 3 trial hits its primary endpoint. So while the megablockbuster sales thesis is probably out the window, AT-527 could still post some impressive sales at the end of the day.
In short, Atea's stock will undoubtedly require investor patience, but it does come across as an intriguing rebound candidate.
Agenus: A regulatory miscue
Agenus, a small-cap cancer specialist, lost almost a quarter of its value last week. Shareholders hit the exits on this stock last week after the company announced that it had withdrawn the Biologics License Application (BLA) for the second-line cervical cancer drug known as balstilimab. The company did so in response to the Food and Drug Administration (FDA)'s granting a full approval for Merck's rival therapy, Keytruda, for this indication. Agenus also announced that it will discontinue the drug's ongoing confirmatory trial in this patient population, which ought to slash the company's research and development expenses by a healthy $100 million.
Where do things stand now? My take is that investors overreacted to this news. Balstilimab's monotherapy indication as a treatment for advanced cervical cancer was never going to be a big moneymaker for the company. Agenus even admitted as much in its press release last week. By contrast, Agenus' next-generation checkpoint inhibitor therapies, and partnerships with the likes of Bristol Myers Squibb, Gilead Sciences, among others, will ultimately be the biotech's core value drivers. In fact, I think this tiny cancer company will have one of its partners buy it out within the next 12 months. The emerging trend in biopharma is to acquire promising cancer assets early in their developmental process, and Agenus has an expansive pipeline chock-full of those types of therapies.
Novavax: Can this vaccine company deliver?
Shares of vaccine developer Novavax plunged by almost 17% last week, following a Politico article claiming that the biotech's COVID-19 vaccine manufacturing process may not be up to regulators' quality standards. The big deal is that the article's anonymous sources reported that the company could take until the end of 2022 to resolve these manufacturing issues and win regulatory authorizations for its COVID-19 vaccine candidate. By then, the pandemic may be winding down, thereby lowering the demand for additional vaccines. So, in a worst-case scenario, Novavax's experimental COVID-19 vaccine may badly miss Wall Street's sky-high revenue projections in the coming years.
Can Novavax adapt and overcome? The company has repeatedly missed its own regulatory submission deadlines for the vaccine this year, and it has no experience at scaling up its manufacturing process to bring a product to market. That's the bad news. The good news is that the company's management did note in a reponse to this article that it remains confident in its ability to produce high-quality vaccines at scale. If true, Novavax's stock should rebound nicely from this hefty downturn. The biotech's stock, after all, is currently trading at less than 2 times 2022 projected revenue -- which is dirt cheap for a biotech stock.
Ocular Therapeutix: A key clinical setback
Ocular Therapeutix saw its shares crater by 38% last week in response to a failed phase 2 trial for the dry-eye treatment OTX-CSI, a hydrogel insert containing the immunosuppressant medication cyclosporine. The biopharma and its shareholders had hoped that this experimental treatment would be a healthy revenue generator for the company in the years ahead. Those hopes, however, were dashed when the drug failed to boost tear production in this midstage trial.
Can Ocular's stock recover this lost ground? I think there's a strong probability that this beaten-down biotech will recover, and perhaps quickly. The biotech has multiple upcoming clinical catalysts in the high-value areas of episodic dry-eye disease, glaucoma, and wet age-related macular degeneration. What's more, Ocular does have its FDA-approved eye inflammation drug, Dextenza, to fall back on. This single product is forecast to rake in over $250 million in peak sales, which is a fairly healthy revenue stream for a company with a $529 million market cap at present. Ocular's shares, therefore, might turn out to be a downright bargain after last week's massive sell-off.
