There's no denying that 2021 has been a rough year for many biotech stocks. The shares of quite a few big and small biotech companies alike are set to finish the year in negative territory. But those disappointing performances won't necessarily extend into the future.
We asked three Motley Fool contributors to pick biotech stocks that sank in 2021 but could soar in 2022. Here's why they chose Axsome Therapeutics (AXSM -0.50%), Novartis (NVS -1.34%), and Vertex Pharmaceuticals (VRTX -1.42%).
Long-term catalysts abound for this biotech
Prosper Junior Bakiny (Axsome Therapeutics): Shares of Axsome Therapeutics have dropped by more than 50% this year. The company has had to deal with various setbacks. Most notably, the regulatory review of Axsome Therapeutics' lead pipeline candidate, AXS-05, was delayed. The Food and Drug Administration (FDA) was supposed to complete its review of the potential therapy for major depressive disorder in late August.
But the agency found deficiencies in Axsome Therapeutics' application. As a result, the FDA has yet to approve the drug. While this issue hurt Axsome Therapeutics' stock performance, the future looks bright for the company. AXS-05 proved effective at reducing the symptoms of depression in a late-stage study.
The need for a medicine like AXS-05 has only increased as a result of the pandemic, with the number of people suffering from symptoms of depression nearly quadrupling to 80 million since the outbreak started. AXS-05's delayed review isn't ideal, to say the least. But given the solid results it delivered in clinical trials and the dire need for depression therapies, it looks likely to hit the market eventually.
But Axsome Therapeutics is also developing several other medicines. These include AXS-07, a potential treatment for migraines, and AXS-12 and AXS-14, aimed at treating narcolepsy and fibromyalgia, respectively. The company estimates the potential annual sales of these medicines to be between $4 billion and $9 billion.
Meanwhile, Axsome Therapeutics' market cap of $1.4 billion is currently less than half of the low end of these projections. That gives Axsome Therapeutics a tremendous upside potential. Naturally, risks are involved; the company could run into more regulatory roadblocks for AXS-05 or some other pipeline candidate.
But on the flip side, if Axsome Therapeutics starts racking up regulatory approvals for its therapies, its shares will soar next year and beyond. While I wouldn't recommend going all-in on this company -- it'd be best to initiate a small position, for now -- 2022 could prove to be a much better year for the biotech.
Ready to take off
David Jagielski (Novartis): Investors have been moving away from high-priced growth stocks and into more value-oriented investments in recent weeks. One stock that has benefited from that is healthcare company Novartis, which is up over 5% in the past month while the S&P 500 has fallen 2%. The drugmaker's shares are still down 9% year to date. But if the shift to value stocks continues, Novartis may continue climbing into next year.
The business itself is in solid shape. Novartis posted a profit of $9.8 billion on sales of $52.4 billion over the trailing 12 months, good for a profit margin of just under 19%. It has also generated a boatload of money, with free cash flow during that time coming in at $12.2 billion. And the company is getting even more cash into its financials after selling its stake in drugmaker Roche for $20.7 billion. As a result of this windfall of cash, the company is planning to buy back up to $15 billion worth of its shares by the end of 2023.
Cash is king, and Novartis is generating plenty of it these days. That will give the company lots of flexibility moving forward should it want to pursue an acquisition or invest in expanding its business in other ways. Novartis projects that through new products and approvals its business can continue growing sales by at least 4% per year until 2026.
Currently, the stock trades at 20 times earnings. That's a deal given that the average healthcare stock in the Health Care Select Sector SPDR Fund trades at a multiple of more than 25. And Novartis' dividend yield of 3.8% makes the stock even more attractive to long-term investors. The average stock on the S&P 500 pays a dividend that yields only 1.3%. I'm confident that as investors focus more on value next year, Novartis could become a more popular stock to own.
This monopoly is playing some new games
Keith Speights (Vertex Pharmaceuticals): Vertex's share price dropped close to 25% year to date by early October. The biotech stock has since made a solid comeback, but it's still down 6%.
The company has enjoyed a virtual monopoly in treating the underlying cause of cystic fibrosis (CF) for years. Vertex still has growth potential in the global CF market. However, investors have been anxious for the drugmaker to successfully expand into new therapeutic areas. Although Vertex has experienced some failures in the past with these efforts, it appears to be in a strong position to branch out beyond CF now.
Vertex and CRISPR Therapeutics expect to file for regulatory approvals of CTX001 in late 2022. CTX001 is a promising CRISPR gene-editing therapy that could effectively cure transfusion-dependent beta-thalassemia and sickle cell disease.
In addition to this partnered program, Vertex is advancing its internally developed candidate VX-147 into pivotal studies early next year targeting APOL1-mediated kidney disease. The company reported positive results from a phase 2 study evaluating the experimental drug earlier this month. Over 100,000 people in the U.S. and Europe have APOL1-mediated kidney disease. That's a bigger market than CF for Vertex to target.
CTX001, VX-147, and continued momentum for the CF franchise are likely to be the primary growth drivers for Vertex in the near term. Over the longer term, though, the company could have additional winners from its pipeline. Vertex also has a hefty cash stockpile to use in making acquisitions and licensing deals.
This has been a disappointing year for the big biotech stock. But I think 2022 will be a happy new year for Vertex shareholders.