Before biotech companies have sales to report to investors, their share prices often live and die on the enthusiasm they can build about their ongoing clinical trials. And when those trials disappoint, biotech stocks can suffer mightily.
Consider Structure Therapeutics (GPCR -0.10%), which saw its shares fall 43% on Dec. 18 after publishing some clinical-trial data that the market disliked. But the trial wasn't necessarily a complete failure, and as skilled investors know, when there's a mismatch between sentiment and actual results, there's often opportunity to profit.
So let's examine whether Structure is worth buying now after its recent crash.
Hot markets crave hot data
You've probably heard of the popular medicines for weight loss and type 2 diabetes, like Ozempic by Novo Nordisk and Mounjaro, made by Eli Lilly (LLY 1.19%). Those drugs are what's called glucagon-like peptide-1 receptor agonists, or GLP-1 RAs for short.
By 2031, the market for GLP-1 RA drugs could be as large as $90 billion, according to an estimate by Pfizer's CEO. So it's no surprise that biotechs like Structure are looking to get in on the action during the market's heady days.
Enter GSBR-1290, Structure's GLP-1 RA program, which is currently in phase 2 clinical trials for diabetes and obesity. Unlike Mounjaro and Ozempic, GSBR-1290 is a pill rather than as an injection, so it could be more appealing to patients. But when Structure published an update with some of its phase 2 data on Dec. 18, the stock crashed.
Investors seem to be assuming that Eli Lilly's oral GLP-1 RA candidate, which is in phase 3 trials (called orforglipron), is more effective than Structure's. According to the published data from a phase 2 study of orforglipron, patients taking it to treat obesity experienced an average decrease in weight of 8.6% to 12.6% after 26 weeks of treatment.
Structure's interim phase 2 data shows that patients treated for obesity with GSBR-1290 lost between 3.3% to 3.5% of their body weight after 12 weeks of treatment, with the pace of loss slowing toward the end of the period. While drawing firm conclusions will need to wait until the full data set is reported (possibly as soon as the second quarter of 2024), it does indeed look like GSBR-1290 is a bit less potent than Eli Lilly's entrant.
Things aren't as bad as they might seem
But Structure's stock can probably come back from this bump in the road. Here's why. As of the end of the third quarter, it had $205 million in cash, equivalents, and short-term investments, which is quite a lot when considering its trailing-12-month operating expenses are only $53 million.
The company also just wrapped up a round of equity financing worth $300 million in October, so now management thinks it has enough gas in the tank to get it through the end of 2026 at minimum, which pencils in as being a conservative and reasonable estimate.
Put differently, it has at least three years of general costs and research and development expenses covered, so it isn't at risk of going out of business anytime soon. Most biotechs aren't as well capitalized. People who buy its shares now thus have a fairly low risk of getting their shares diluted by more stock issuances, at least for a while.
Another benefit of such a strong balance sheet is that the company can afford to run into a few setbacks with its mid-stage clinical trials before it might need to consider raising more cash. On that note, despite the market's negative reaction to its latest clinical trial, the worse-than-expected data do not even qualify as an actual setback.
Fundamentally, the company frankly reported information documenting that its candidate medicine was effective at treating the target conditions as defined by widely accepted metrics; it also reported that the candidate's safety characteristics were consistent with what was found in the phase 1 trials. The company has a drug that looks safe, and it looks like it works, at least preliminarily.
The fact that Structure's candidate might not surpass the best entrants in its category is a relevant concern for investors, but it isn't guaranteed to be a fatal problem for the business. In such a large market, there is a decent chance that the company will be able to find a niche where its candidate is the right tool for a given demographic of patients with specific medical needs. It's also plausible that it could try to compete on pricing, or by finding an unaddressed international market
Plus, major players like Eli Lilly are buying up GLP-1 RA pharmaceutical assets left, right, and center, with the goal of grabbing a slice of the market however they can, even if their products are commercialized years after the current set of leaders. That means Structure might be able to make a tidy profit by off-loading its most mature program, enabling it to invest in next-gen approaches that have a better shot at competing.
At present, there are no such offers in the works, but the ongoing level of business development activity in the field suggests that it's possible.
Appreciate the risks of investing now
Structure Therapeutics is doubtlessly a bruised biotech stock at the moment. Even if it can get regulators to approve GSBR-1290, it'll be arriving very late to a crowded market where powerful competitors have had years to entrench themselves. There is a decent chance that under those conditions, the company would still be able to find itself a small sliver of the market to hold on to, but it would be difficult for anyone to be excited about the stock.
All of this is to say that this is a risky stock to hold for the long term. The market's recent dumping of the stock was likely an overreaction that presents a potential opportunity for more risk-tolerant investors to take on the possible perils with a more favorable margin of safety than usual, but it isn't the right opportunity for everyone.
If you wouldn't usually opt to invest in pre-revenue biotech stocks, it's better to look elsewhere. On the other hand, if you're comfortable with investing in potential turnaround plays in biotech, this one could well be a great move for you.
