U.S. stock markets have been exceedingly volatile in 2022. This turbulent environment hasn't kept some of the world's best investors on the sidelines, however.
The billionaire brothers Julian and Felix Baker -- co-owners of the biotechnology focused hedge fund Baker Bros. Advisors -- are a prime example. The fund's most recent 13F filings with the Securities and Exchange Commission show that the fund was extremely active from a buying standpoint in the second quarter of 2022.
Perhaps most interestingly, the Baker brothers bought large chunks of small-cap healthcare stocks Affimed (AFMD -13.51%), Cerus Corporation (CERS -9.55%), and Replimune Group (REPL -1.24%) in the most recent quarter. All three of these biotech stocks have fallen in a big way over the course of 2022.
Should investors take a cue from this top-notch biotech hedge fund, or are these beaten-down bio-equities simply too risky to own right now? Let's dig deeper to find out.
Affimed: A powerful approach to treating blood cancer
Affimed is a German biotech developing a novel platform of innate cell engagers, which are antibodies that link natural killer cells and tumors, for the treatment of various blood cancers. To date, the company has produced a highly compelling data for relapsed/refractory CD30-positive lymphomas, as well as for relapsed/refractory peripheral T-cell lymphoma.
Recently, Affimed suffered a minor setback after discussions with the Food and Drug Administration (FDA) led the company to pull its initial clinical program in the U.S. for AFM28, an experimental acute myeloid leukemia candidate. The company said it plans to circle back to this program once it has additional data for AFM28 from ex-U.S. clinical sites.
Despite Affimed's steady progress in the clinic, the biotech's stock is currently down by nearly 50% for the year. Wall Street, in short, has shown no patience for experimental-stage biotech companies this year, and Affimed's stock has suffered as a result. Saavy investors, though, may want to follow in Baker Bros.' footsteps on this one. Affimed's lead product candidate, AFM13, could generate several hundred million in sales upon approval -- and the data thus far appears to be game-changing.
Cerus: A massive growth opportunity
Cerus is a small-cap biotech focused on expanding the use of its proprietary technology known as the Intercept Blood System, which is designed to reduce pathogen loads in various blood components.
The company's core value proposition centers on having this novel platform become the industry's standard for blood safety. If Cerus can achieve this lofty goal, it ought to be able to generate between $1 billion and perhaps $2 billion in annual sales.
The biotech is currently on track to rake in approximately $204 million in sales next year. So there is quite a bit of growth potential associated with this name. Nonetheless, Cerus' stock has still shed more than a third of its value so far this year.
Should investors catch this falling knife? Cerus' top line has been jumping at a tantalizing pace of late, implying that its strategy is indeed paying dividends. Even so, this biotech is probably going to be a long-term play because of the mechanics of this particular healthcare market. Therefore, investors probably shouldn't buy this growth stock unless they're willing to hold for at least three to five years.
Replimune Group: A novel anti-cancer treatment
Replimune is a tumor-directed oncolytic immunotherapy company. Its stated ambition is to develop a top-notch skin cancer franchise centering on the modified herpes virus RP1.
Replimune is currently trialing the therapy in a registration directed clinical study, as part of a combo therapy with Regeneron's anti-PD-1 therapy, cemiplimab, in patients with advanced cutaneous squamous cell carcinoma. Top-line data for this pivotal trial are expected to be announced sometime in the first half of 2023.
In addition, Replimune also has an active collaboration with Bristol Myers Squibb for advanced skin cancer patients. The next batch of data from this collaboration is expected to drop in the first half of 2023 as well.
Thanks to the biotech bear market, Replimune's shares have lost a hefty 26% of their value over the course of 2022. Most investors, in short, simply aren't willing to hold this risky biotech stock heading into these upcoming clinical catalysts.
Is Replimune a contrarian buy? Wall Street thinks this speculative cancer stock could jump by a whopping 136% over the next 12 months. This enormous upside potential is far from risk-free, however. Although Replimune's platform has been posting some rather compelling trial results to date, experimental cancer therapies fail more often than not in pivotal-stage trials. As a result, this developmental-stage biotech stock is arguably only suited for ultra-aggressive investors at this point in its life cycle.