The potential for four or more interest rate hikes by the Federal Reserve over the course of 2022 has been weighing heavily on growth stocks of late. Yesterday, clinical and early commercial stage biopharmaceutical stocks took a particularly big hit in response to this risk factor. Investors are clearly pivoting toward safe havens like value and dividend stocks ahead of this perceived eventuality. The net result is that quite a few promising biopharma stocks are now trading at deep discounts relative to their long-term potential.
Which biopharma stocks are simply too cheap right now? Shares of the cancer specialists Adaptimmune Therapeutics (ADAP 3.41%) and Clovis Oncology (CLVS) are both trading at absurdly low valuations following their steep downturns over the past several weeks. Here's why bargain hunters might want to take advantage of this weakness in these two small-cap biopharmas.
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Adaptimmune: This bear market is punishing success
On Nov. 11, 2021, the British cell therapy company reported that its lead asset known as afamitresgene autoleucel will hit the primary endpoint in a registrational trial for patients with advanced synovial sarcoma or myxoid/round cell liposarcoma. A regulatory filing with the Food and Drug Administration (FDA) is on tap later this year. How did the market react? Adaptimmune's shares have lost 34% of their value since it provided this positive clinical update, and are now trading at a little under two times cash and cash equivalents. For a biotech with a well-differentiated anti-cancer platform and one on the verge of producing a commercial-stage product, that's a mind-boggling valuation.
The market's dire take to Adaptimmune's progress in the clinic is not a normal response, to put it mildly. While afamitresgene autoleucel's lead indication certainly isn't a blockbuster commercial opportunity, these positive trial results are proof that the company's solid tumor cell therapy platform is a valid approach. In the years ahead, Adaptimmune has designs on targeting several additional difficult-to-treat solid tumors with its potent cell therapies -- some of which are blockbuster opportunities. Before the biotech's pipeline matures much further, however, there is a strong chance that one of its various big pharma partners will make a tender offer, especially if the market continues to value it this way. GlaxoSmithKline, for instance, is in need of new oncology assets and the company might get a major financial windfall soon through the sale of its consumer healthcare business.
In short, Adaptimmune's bargain bin valuation won't last forever.
Clovis Oncology: The short thesis might be overdone
Over the prior 36 months, Clovis' stock price has dropped by approximately 90%. The biotech's inability to turn its Poly ADP-ribose Polymerase (PARP) inhibitor Rubraca into a viable growth product is the core reason behind this downward trend.
What's more, Clovis' recent unaudited financial results for the fourth quarter and full year of 2021 don't paint an encouraging picture. In brief, the drug's sales have been going in the wrong direction over the last 12 months due to both intense competition in the jam-packed PARP inhibitor space and the pandemic. The net result is that the biotech's stock is currently being valued at well under two times 2022 projected sales, which is one of the lowest valuations for any commercial-stage cancer stock at the moment.
To reverse its fortunes, Clovis is pinning its hopes on three key clinical readouts for Rubraca over the course of 2022. Whether or not these ongoing trials pan out, however, Clovis is going to have some hard decisions to make in 2022. The bottom line is the company isn't exactly flush with cash and it may have to do a sizable capital raise later this year as a result. That's not ideal for a company with a share price at under $2.50 at the time of writing.
What does this all mean? Clovis' best option is arguably to land a buyer. While the elite big pharma companies probably wouldn't be interested, there are a handful of major drug companies that could use a drug like Rubraca in their portfolio -- especially if Clovis could be had for around $1 billion or less. A large biopharma, after all, would likely have far greater success at marketing this cancer therapy.
All told, Clovis does have a promising asset that could attract a buyer in 2022. That doesn't mean the company will go this route, but it is a real possibility -- especially at these levels -- that bears shouldn't overlook.
