When fear rules the markets, investors usually have a hard time seeing the long-term benefits of stock investing. Even share prices of companies with potentially solid long-term prospects remain depressed. In such an environment it does become difficult to identify the real winners.
The good news is the market eventually recognizes a real long-term winner, re-adjusts its expectations about that company, and bids up its stock price. Two such potential long-term winners are biotechnology companies Krystal Biotech (KRYS -1.61%) and BioXcel Therapeutics (BTAI 1.61%), and the market could well bid up their stocks over the next 12 months.
1. Krystal Biotech
Biotechs that focus on gene-editing technologies have made a lot of noise in the past few years. Gene-editing refers to a collection of techniques that allow scientists to modify an organism's DNA. The technology promises to unlock therapies for difficult-to-treat illnesses. Krystal Biotech seeks to develop medicines using gene-editing primarily for dermatologic diseases.
Krystal's leading pipeline candidate is Vyjuvek, a gene-editing therapy that targets dystrophic epidermolysis bullosa (DEB), or "butterfly skin", at the genetic level. This rare condition weakens patients' skin and makes them substantially more susceptible to injuries, even for otherwise ordinary things such as scratching to relieve an itch.
Krystal sent an application to the Food and Drug Administration (FDA) for Vyjuvek in June, and it could make another regulatory application in Europe and Japan by the end of the year. DEB is rare: The biotech estimates that there could be as few as a combined 9,000 patients across the markets it is targeting.
Current standards of care for DEB consist of treating patients' wounds; no approved therapies target the disease at the genetic level. Vyjuvek could change that. And if it earns the green light in the U.S. and abroad, expect Krystal Biotech's stock to jump on the news.
The company is targeting other illnesses; its pipeline includes about a dozen programs. To be clear, smaller biotechs do not necessarily need a lineup and pipeline with dozens of products to be successful. Exelixis is an example of a drugmaker that has achieved some success with a pretty thin lineup focused on cancer treatments.
Still, if Vyjuvek earns approval, that will help validate Krystal Biotech's gene-editing therapies focused on dermatologic disease and perhaps attract collaboration from larger companies with deeper pockets. Of course, the treatment could hit regulatory delays or worse. The company's other programs could also run into clinical roadblocks.
It's crucial to weigh these risks against the potential upside Krystal offers. And in my view, the biotechnology stock looks too risky for most investors since it's yet to generate any revenue. But for those who can handle the volatility, it could rise substantially in the next year and -- if its master plan is realized -- might end up delivering solid returns beyond the next 12 months.
2. BioXcel Therapeutics
BioXcel Therapeutics earned approval for its leading candidate, Igalmi, in April. Igalmi is a film that dissolves under the tongue to treat acute agitation (characterized by intense and aggressive physical activity and emotional symptoms) in patients with schizophrenia or bipolar disorder. Despite the approval, BioXcel Therapeutics has lagged the market this year.
In my opinion, the company's current market cap of about $367 million understates the commercial opportunity for Igalmi. There are 7.3 million people diagnosed with schizophrenia or bipolar disorder in the U.S., and up to 39 million episodes annually of agitation associated with both conditions. Current treatments typically come with severe potential side effects.
BioXcel Therapeutics' stock could start moving in the right direction as it makes headway into this patient population.
Furthermore, the company's opportunity in the Alzheimer's disease (AD) market is even more attractive. The biotech plans on starting a phase 3 clinical trial for Igalmi in treating agitation in AD before the end of the year. BioXcel expects topline data from another late-stage study for Igalmi in treating AD during the first half of 2023. Positive results could send its stock soaring.
In 2020, almost 6 million people in the U.S. had AD, and that number is expected to continue growing. An estimated 100 million episodes of agitation are associated with AD in the U.S. each year.
BioXcel will seek to earn even more label expansions for Igalmi and some of its other candidates in neuroscience. The company does not have as large a pipeline as Krystal Biotech, but it targets illnesses with millions of patients and for which effective treatments have been hard to come by.
BioXcel is subject to the same risks as other biotech companies. And if it fails to impress with the ongoing launch of Igalmi, especially its late-stage clinical trial in AD, investors could be left with practically worthless shares. With that said, the returns could be huge if all goes according to plan.
Risky, but worth it
To be fair, both these biotechs carry above-average risk, since neither has started generating revenue yet. But if these therapies eventually hit the market, the returns could be juicy. Savvy investors should closely watch for further developments in these companies.