Biotech stocks are like Wall Street's roulette wheel. While many pre-clinical and clinical-stage compounds will fail to make it to pharmacy shelves, those that do can have life-changing impacts on patients and patient investors.
Thanks to ongoing innovation, better diagnostic tools, and the incredible pricing power of brand-name therapeutics, Grand View Research expects a compound annual growth rate of nearly 14% from the global biotech industry through 2030. This would put worldwide biotech revenue on a path to reach almost $3.9 trillion by the turn of the decade. In other words, investing in this industry can be a genius move.
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However, not all biotech companies are created equally. As we move into the homestretch for 2022, two cash-rich and inexpensive biotech stocks with clear-cut catalysts stand out as no-brainer buys for 2023. Meanwhile, one widely held drug developer with plenty of cash on its balance sheet should be actively avoided in the new year.
Biotech stock No. 1 to buy hand over fist in 2023: Novavax
The first biotech stock investors can confidently buy hand over fist in 2023 is Novavax (NVAX -0.95%). If the name rings a bell, it's because Novavax has been one of the biggest boom/bust stocks within the drug space due to the COVID-19 pandemic.
Since hitting its all-time high less than two years ago, shares of Novavax have retraced 95%. While NVX-CoV2373 (known as Nuvaxovid in overseas markets) offered plenty of promise, numerous emergency-use authorization filings were delayed in developed markets. Additionally, slow vaccine production hurt any chance of Novavax securing the "easy" revenue tied to initial-series COVID-19 vaccines in these high-dollar developed markets.
However, with shares down 95%, the risk-versus-reward with Novavax has very much shifted to the latter.
The first thing to note about NVX-CoV2373 is that it's among rare company. Only NVX-CoV2373 (90.4% in the company's U.S./Mexico trial in 2021), Moderna's (MRNA 0.89%) Spikevax (94.1%), and Comirnaty from Pfizer and BioNTech (95%) reached respective vaccine efficacies above 90%. This should give Novavax plenty of ground to stand on when competing against its rivals.
To add to the above, Novavax offers differentiation. Whereas Spikevax and Comirnaty are messenger-RNA vaccines, Novavax's NVX-CoV2373/Nuvaxovid is a protein-based vaccine utilizing older technology. Using bits of spike protein, the Novavax vaccine can teach a person's immune system how to recognize and fight the SARS-CoV-2 virus and potentially many of its variants.
But the key takeaway for investors is that Novavax's drug platform works. Aside from generating recurring revenue via initial series of vaccines and boosters, the company has the opportunity to target specific variants of COVID-19, as well as develop combination therapies. With one success already under its belt, Novavax is ahead of the game compared to most small-cap biotech stocks.
Lastly, it's sitting on $1.28 billion in cash and cash equivalents as of the end of September. This should be more than enough to advance COVID-19 variant-specific studies, as well as those aforementioned combination vaccine trials.
Biotech stock No. 2 to buy hand over fist in 2023: Exelixis
The second biotech stock that makes for a surefire buy in 2023 is cancer-drug developer Exelixis (EXEL 1.80%).
If there's a knock against Exelixis, it's that its share price hasn't budged in six years. Investors appear to be skeptical of the company's top-heavy portfolio, which is almost entirely dependent on blockbuster cancer drug Cabometyx. If drug companies fail to diversify their revenue stream, they run the risk of having biosimilar or generic competitors eventually eat away at the lion's share of their sales and operating cash flow. Thankfully, this isn't nearly as big of a risk as it seems.
Cabometyx is currently approved as a treatment for first- and second-line renal cell carcinoma (RCC) and advanced, previously treated hepatocellular carcinoma. But what's interesting is that Exelixis lists more than 70 ongoing clinical trials designed to potentially expand Cabometyx's label.
To be blunt, some of these label expansion trials won't succeed, just as the non-small-cell lung cancer study of Cabometyx in combination with Roche's Tecentriq showed last week. However, Exelixis already gained its first-line RCC indication via a combination trial with Bristol Myers Squibb's cancer immunotherapy Opdivo. If even a small percentage of these ongoing studies bears fruit, Cabometyx can generate in excess of $2 billion in annual sales and lengthen its sales exclusivity in these indications.
Perhaps more important is the fact that Exelixis has gone on the offensive when it comes to drug development. It's rekindled its internal research engine and, inclusive of collaborations and licensing agreements, has six novel cancer compounds currently being researched or moved into clinical-stage trials.
If you're wondering how Exelixis funds its research, trials, and collaborations, look no further than Cabometyx as a cash cow and the company's pristine balance sheet. As of the end of the third quarter, the company boasted nearly $2.1 billion in cash, cash equivalents, and restricted cash equivalents and investments. Exelixis could comfortably go shopping here, or it could find itself as a relatively safe acquisition target by a pharmaceutical company looking to bolster its oncology portfolio.
In terms of valuation, Exelixis can be purchased for 16 times Wall Street's forecast earnings per share in 2023. That's quite inexpensive for a company whose sales continue to grow by double-digits each year.
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The biotech stock to avoid like the plague in 2023: Moderna
Unfortunately, not every biotech stock is going to be a winner. Although Moderna has been a top performer since becoming a publicly traded company, and it's sitting on a hearty cash balance, there are a couple of red flags that make it an easy stock to avoid in 2023.
To start with the positive, Moderna was a huge winner in the COVID-19 vaccine space. This year, it's expected to rack up between $18 billion and $19 billion in advanced purchase agreements for Spikevax. The abundant cash flow generated from its vaccine helped finance a $3 billion share buyback program, as well as grow the company's robust balance sheet to $17 billion in cash, cash equivalents, and investments.
This week, Moderna also reported promising mid-stage results involving mRNA-4157/V940 in combination with Merck's (MRK 0.10%) superstar cancer immunotherapy Keytruda for patients with melanoma. Adjuvant treatment of this combination reduced the risk of reoccurrence or death by 44% when compared to Keytruda as a monotherapy. In other words, there's long-term promise here for the company's cancer vaccine pipeline.
However, a $76 billion market cap for a company currently generating its sales from a single drug (Spikevax) is a risk investors shouldn't be taking. In 2023, COVID-19 vaccine sales shift away from advanced purchase agreements and to the private market. While this could mean better pricing power for Moderna, it also increases competition and removes revenue transparency.
With Novavax now on the scene and the worst of the pandemic in the rearview mirror in a number of developed markets, Moderna's sales could plunge by 25% to 68% next year, based on Wall Street's wide gamut of analyst expectations. At the consensus of $8.74 billion, Moderna is approaching a valuation of 9 times sales, which is quite pricey within the biotech space.
As I touched on earlier, it's also risky for a biotech stock to be reliant on a single therapeutic. Although its cancer vaccines have shown promise, they're years away from generating meaningful revenue for Moderna, assuming they succeed in late-stage trials and get the nod from the U.S. Food and Drug Administration. Moderna's sales are unlikely to begin trending higher again until 2025 or 2026.
With its sales and profits set to fall off a cliff in 2023, Moderna can be avoided like the plague.
