Growth-oriented healthcare stocks have been trending lower ever since the start of the fourth quarter of 2021. Investors have been sidestepping this asset class in response to rising interest rates, industry-specific risks emanating from the conflict in Ukraine, unfavorable foreign exchange rates, and a wave of profit-taking following healthcare's stellar performance over the period covering March 2020 to March 2021. Speaking to this last point, the closely watched SPDR S&P Biotech ETF more than doubled in value during this feverish period for healthcare stocks in general.
The good news is that this protracted bear market may be starting to wind down. As proof, the bellwether Morningstar Healthcare Sector Index ticked higher by a respectable 2.5% over the prior four weeks, despite a glut of less-than-ideal macroeconomic data during this period. For context, the S&P 500 lost 0.41% and the Nasdaq Composite sank by 6.22% over this same time frame. Healthcare stocks thus appear to be gradually breaking out of their prolonged slump.
Which healthcare stocks are the most compelling buys as market conditions slowly improve? Liver disease specialist Madrigal Pharmaceuticals (MDGL -1.47%) and central nervous system drugmaker Axsome Therapeutics (AXSM -12.57%) are two names that could move sharply higher in the coming months. Here's why.
Madrigal: This clinical catalyst could be a gamechanger
Wall Street is expecting big things from Madrigal Pharmaceuticals later this year. The lowdown is that the company is slated to announce top-line data from a phase 3 biopsy study at some point in the fourth quarter of 2022.
This pivotal trial, which is designed to assess the safety and efficacy of the once-daily oral thyroid hormone receptor beta-selective agonist, resmetirom, in treating nonalcoholic steatohepatitis (NASH) patients, could be worth billions in future revenue. As a direct result, Wall Street thinks a positive readout for resmetirom in this high-value indication might propel the biotech's shares northward by as much as 134% from current levels.
What's the risk? NASH has proved to be a tough nut to crack. To date, every late-stage compound has either failed to show clear signs of efficacy in this common liver ailment, been tripped up by safety concerns, and/or exhibited an unfavorable drug-to-drug interaction profile. Consequently, the Food and Drug Administration (FDA) has yet to approve even a single medication for this often fatal liver condition.
Will resmetirom be the first FDA-approved NASH medication? While the drug's emerging clinical profile seems to point toward a win in this upcoming data reveal, history has shown that NASH drug trials are impossible to handicap. In turn, investors may want to keep any initial position on the small side until the study results are a known quantity and the market has had time to ponder the details.
Axsome: All eyes on the biopharma's new drug launch
A little less than three weeks ago, Axsome announced that its newly approved major depressive disorder (MDD) drug, Auvelity, was made officially available by prescription in the United States. And since this announcement, Axsome's stock has risen by nearly 30%.
While the exact reason for this sudden bullish trend is up for debate, there's no doubt that this commercial-stage biotech stock might still be woefully undervalued. Stated simply, Axsome's market cap of approximately $2.44 billion simply doesn't reflect Auvelity's massive commercial potential.
Speaking to this point, this new MDD medication is forecast to rake in nearly $2 billion in annual sales at peak. Historically, most commercial-stage biotech stocks trade at no less than three times the estimated peak sales of their flagship products -- meaning that Axsome's stock might be undervalued by as much as 145% at current levels.
What's on tap in the short term for the company? Axsome is set to reveal its 2022 third-quarter results next week. Even though the company probably won't have much to report from a revenue generation standpoint, Axsome's results might provide some crucial insight into the company's near-term trajectory.
What's the key issue investors ought to be on the lookout for when Axsome reports Q3 earnings? Most newly minted commercial-stage biotechs struggle to get healthcare providers to accept their products. To avoid this common pitfall, Axsome might choose to partner with a deep-pocketed big pharma on Auvelity's commercial launch.
What's important to understand is that a partnership would probably come with a sizable up-front cash payment, as well as a possible equity stake -- one that may evolve into a full-blown buyout -- from an established player in the field. What's more, a co-promotional deal, especially one with a top tier neuroscience company, would take a lot of the risk out of Auvelity's commercialization.
Overall, Axsome's shares seem poised to continue their bullish ways because of Auvelity's ginormous commercial opportunity, along with the distinct possibility that a big pharma could take an ownership stake in this novel MDD drug sometime soon.