The biotech industry's biggest names tend to receive most of the attention. Many smaller players, on the other hand, are just getting warmed up.
It may only take a few positive clinical updates, regulatory decisions, or a single successful drug to turn a biotech company's fortunes around. For example, consider Moderna. It grew from a $4 billion company into a $59 billion company thanks to the success of its coronavirus vaccine.
Here are two biotech firms that are undervalued today, but have the potential to grow into thriving businesses soon.
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1. Axsome Therapeutics
While most growth stocks sank sharply in 2022, shares of Axsome Therapeutics (AXSM -2.61%) shot up by 104%. This year, on the other hand, has gotten off to a slow start -- it's up by just about 1% so far in 2023.
Yet the near future looks exciting for this biotech. It has two approved therapies, two promising new drug candidates in late-stage development, and several more candidates in its pipeline.
Sunosi, which it acquired from Jazz Pharmaceuticals in May 2022, is used to treat narcolepsy-related excessive daytime drowsiness. In the first quarter, the drug generated $13 million in net sales in the U.S. alone.
Auvelity, the company's other approved product, is used to treat depression and major depressive disorder. The drug has been a success since its launch in the United States in October. It made $15.7 million in net sales in the first quarter.
In the years since the start of the pandemic, the number of major depressive disorder diagnoses has dramatically increased. This medication has proven to be a game-changer for Axsome. Once both of these drugs are available in international markets, Axsome's revenue could move sharply higher. Sunosi has already made $1.7 million internationally.
Sunosi's use in international markets also generated royalty and licensing revenue for the company. Axsome made a total of $94.6 million in revenue in the first quarter. It's not yet profitable, but if its revenue continues to rise at this rate, it may soon see green in its bottom line.
The company may also launch a few new exciting products in the coming years, among them AXS-05, a drug candidate that's intended to support smoking cessation and treat Alzheimer's disease agitation. A phase 3 clinical trial is underway for that second indication.
Other products in Axsome's pipeline include AXS-07, a potential migraine treatment; AXS-12, a narcolepsy treatment; and AXS-14, for fibromyalgia management. What's more, Sunosi is being studied as a treatment for attention deficit hyperactivity disorder (ADHD). The company intends to begin a phase 3 clinical trial of Sunosi in the second quarter for that indication.
2. Exelixis
Exelixis (EXEL 1.80%) already has a blockbuster product in its portfolio that is driving exceptional growth. Cabometyx, its star cancer treatment, generated $1.3 billion in revenue in 2022. And in Q1 2023, sales of the drug hit $362 million, up 19% year over year.
Cabometyx is a cancer treatment that is used for advanced renal cell carcinoma (RCC), as well as other types of cancer. Cometriq, a Cabometyx variant used to treat thyroid cancer, also contributes to overall revenue. However, the company's overall adjusted net income for the quarter fell to about $53 million in Q1, down from $84 million in the prior-year period.
Exelixis recognizes that relying solely on one product will not allow it to thrive in this highly competitive industry. Management stated in the Q1 press release: "We've made important progress across our pipeline programs, including advancing the STELLAR-303 and STELLAR-304 phase 3 trials for zanzalintinib, as well as single-agent and combination dose-escalation cohorts of the phase 1 trial of XB002."
These are Exelixis’ advanced cancer therapies. Zanzalintinib is a next-generation oral tyrosine kinase inhibitor, and XB002 is an antibody-drug conjugate that targets a tissue factor in advanced cancers. Exelixis is also working with other companies to develop additional cancer therapies.
No risk, no reward
Both of these companies continue to invest heavily in research and development to diversify their portfolios. In the first quarter, Axsome spent $18 million on R&D, while Exelixis spent around $234 million.
Biotech firms are risky investments because apparently promising products may not live up to expectations in clinical trials and fail to earn regulatory approval. And until they have approved products that are consistently generating revenue, such companies tend to remain in the red. Investors have to be patient to reap the benefits of investing in biotech stocks.
For the time being, both of these companies' financial positions appear to be adequate to support their pipeline development.
At the end of the first quarter, Axsome had $246 million in cash and cash equivalents on the books. Management believes that sum, as well as what remains on a $350 million term loan facility, will be sufficient to cover upcoming product developments and help the company reach cash-flow-positive operations. Exelixis, meanwhile, ended the first quarter with $540 million in cash and cash equivalents on the books.
Once they gain their stride, biotech firms with innovative treatments for difficult-to-address conditions can generally be counted on to continue generating revenue. This is probably one of the best potential perks of investing in such companies as Axsome and Exelixis.
