Thanks to the dual headwinds of sky-high inflation and the threat of rising interest rates, biopharmaceutical stocks appear poised for a turbulent 2022. Underscoring this point, investors have been dumping risky clinical and early commercial-stage biopharma stocks over the past several weeks in response to these closely intertwined macro variables.
This year thus seems destined to be a bona fide "stock-picker's market" for biopharma investors. With these key macroeconomic headwinds in mind, here are my top three biopharma stock picks for calendar year 2022.
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Two ways to win
Aurinia Pharmaceuticals (AUPH 1.25%) might be in the danger category as an early commercial-stage biopharma, but this company has an outstanding chance of producing market-beating returns for shareholders in 2022. The singular reason is Aurinia's oral lupus nephritis (LN) medication Lupkynis (voclosporin). Lupkynis was approved in January 2021, and so far, the drug seems to be grabbing a respectable share of the LN market. Through the first nine months of 2021, for instance, the drug hauled in $22.2 million in sales, which isn't a bad start for a novel medication being marketed by a newly minted commercial biopharma. Even more impressively, though, Wall Street expects Lupkynis to see an exponential growth in sales this year, with the average analyst estimate for 2022 currently sitting at $206.4 million.
On the big-picture side of things, Aurinia's shares appear to be woefully undervalued right in light of Lupkynis' underlying value proposition. From an organic growth standpoint, Wall Street believes the drug will exceed $1 billion in annual sales by 2026. And by the end of the decade, Lupkynis may break the $2 billion annual sales mark, depending on how some would-be competitors fare in their ongoing clinical studies. Aurinia's top line is thus forecast to rise at a compound annual growth rate (CAGR) of approximately 40% over the next five years, and under a best-case scenario, the company's annual sales might even be able to post a CAGR of 33% all the way out to 2030. That's an enormous level of organic sales growth.
Blockbuster drugs, defined as those that eclipse the $1 billion annual sales threshold, don't exactly fall off trees. But Aurinia has also repeatedly been floated as a top buyout candidate over the last two years. Although these rumors have yet to come to fruition, there's no doubt that this idea has a solid basis behind it. Numerous big pharmas with a deep interest in autoimmune diseases like LN are facing key patent expirations in the coming years. Moreover, most of these companies are sitting on a massive stockpile of cash at the moment. Aurinia would thus fill a big hole in their product portfolios.
All told, Aurinia's stock offers investors top-notch levels of organic sales growth, as well as the chance to land a sizable gain through a buyout scenario.
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A major regulatory win could be in the making
Axsome Therapeutics (AXSM 0.44%) is one of the few clinical-stage biopharma stocks that Wall Street remains confident in as 2022 gets under way. The consensus 12-month price target among analysts covering this stock, after all, implies a whopping 161% upside potential from current levels.
Wall Street's confidence stems mainly from the regulatory and subsequent commercial prospects for Axsome's experimental major depressive disorder (MDD) medication AXS-05. The drug was hit with a regulatory delay last year over two analytical methods in the Chemistry, Manufacturing, and Controls section of its regulatory filing with the Food and Drug Administration (FDA). Instead of rejecting AXS-05's MDD regulatory filing outright, though, the FDA appears to be working with the company to address these deficiences -- at least according to Axsome's 2021 third-quarter earnings release.
The big deal is that AXS-05 is forecast to rake in $893 million in sales as a best-in-class therapy for MDD by 2026, according to Evaluate Pharma. That's a gargantuan revenue stream for a biopharma with a current market cap of $1.24 billion. What's more, Axsome is also waiting to hear back from the FDA about a regulatory filing for its acute migraine drug, AXS-07. The drug isn't expected to achieve blockbuster status because of the highly competitive nature of the migraine drug space. But this drug could quite possibly haul in a few hundred million in annual sales at peak.
Why is Axsome's stock trading at such a depressed valuation relative to the combined commercial potential of AXS-05 and AXS-07? The market clearly isn't convinced that the FDA will approve AXS-05 during the current review cycle. That's an interesting take, given that the FDA could have already rejected the drug to force Axsome to address the outstanding deficiencies by way of a revised regulatory filing. Yet the agency hasn't done so more than four months into this extended review cycle.
Bottom line: Axsome's stock is deeply undervalued in the event the FDA does indeed greenlight AXS-05 this year. And if the FDA requires another review cycle for AXS-05, the biopharma's stock is arguably already trading as if this scenario is inevitable.
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A buyout special
Cardiff Oncology (CRDF 5.39%) has also caught Wall Street's eye of late. Wall Street's average 12-month price target implies a jaw-dropping 274% upside potential for this small-cap biopharma, relative to its current price.
Wall Street's enthusiasm for Cardiff emanates primarily from a recent $15 million investment from Pfizer (PFE 1.10%). In brief, Pfizer is loaded with cash from its COVID-19 product sales, and the pharma giant has already announced that it is looking to be aggressive on the merger-and-acquisition scene to head off the eventual commercial decline of this key franchise. Pfizer's sudden interest in Cardiff has thus been widely viewed as a prelude to a potential buyout.
What would Pfizer be getting by buying Cardiff? Cardiff is developing a third-generation Polo-Like Kinase 1 (PLK1) inhibitor known as onvansertib. PLK1 inhibitors have shown promise in the clinic previously, but their unfavorable safety profiles have kept them from becoming an important new class of anti-cancer therapy. Cardiff believes it has solved this toxicity problem with its third-generation PLK1 inhibitor onvansertib.
What should investors be on the lookout for? Cardiff is on track to announce top line results for onvansertib's KRAS-mutated metastatic colorectal cancer study this summer. If the drug's efficacy and safety results are on point, it wouldn't be surprising to see Pfizer pull the trigger on a deal.
Now, despite this interest from Pfizer, Cardiff is undoubtedly a super-risky play. Cancer drug trials have an exceedingly low rate of success, after all.
That being said, Cardiff's enormous upside potential ought to appeal to the risk-tolerant crowd.
