Biotechnology stocks are notoriously volatile. This creates big headaches for anyone who owns them.
But the volatility is great for anyone shopping for new biotech names. The routine sell-offs bring great buying opportunities if you know how to look for them.
Here are two down-and-out biotech names that should be much higher a year from now. I caught up with both companies at the Jefferies 2018 Global Healthcare Conference in New York for updates on why investor fears about them are overblown. Here’s a look.
Gilead Sciences
Stock: Down 44% from 2015 highs.
For most of this decade, Gilead GILD, +0.73% was one of the go-to large-cap biotech names for rich returns, along with Celgene CELG, -0.53% Amgen AMGN, +0.68% and Biogen BIIB, +0.52% Gilead shares vastly outperformed the iShares Nasdaq Biotechnology IBB, +1.73% and SPDR S&P Biotech XBI, +1.08% exchange traded funds. Gilead was a “10-bagger” during 2010-2015 — it rose 10-fold — thanks to its hepatitis C virus (HCV) wonder drug Sovaldi.
Gilead HCV drugs are so good, they have created a problem for the company. The drugs cure patients with a one-shot treatment. By definition, this reduces the potential customer base and obviates recurring revenue. Investors also have concerns about some patent expirations and recent choppy results. So the stock has been thrown into the discount bin.
But Gilead isn’t resting on its HCV laurels. It has several interesting drugs in the works. It seems like investors couldn’t care less, though, and this is what creates the opportunity. “I think it is a good setup here, as expectations are low,” says Jefferies biotech analyst Michael Yee.
What might turn things around? The big potential catalyst plays out in the first half of next year. That’s when the company will release Phase III data from its study of a therapy for nonalcoholic steatohepatitis (NASH). This is an increasingly common nonalcoholic fatty liver disease. In NASH, the accumulation of fat in the liver can cause scarring, cirrhosis and cancer. NASH is linked to overeating. So it’s growing in lockstep with the waistlines of Americans.
Yee thinks investors aren’t pricing any success into Gilead’s stock for its NASH drug, selonsertib. This suggests there is a lot of potential upside, compared to minimal downside because sentiment is already low.
For a preview of how things might play out for shareholders, consider Madrigal Pharmaceuticals MDGL, +0.62% Its stock went ballistic in late May, more than doubling on positive NASH drug study results. I doubt Gilead would be a “double” on its own NASH news. But it would be a big deal. The Madrigal stock move shows us how keen investors are for exposure to NASH cures.
Why should we think Gilead’s Phase III NASH results might be positive? Because in Phase II studies, patient liver biopsies spaced six months apart showed that Gilead’s drug prevented the spread of fibrosis and also reversed it, said Gilead’s chief scientific officer, John McHutchison, at the Jefferies health-care conference. “Everything is headed in the right direction,” he said.
There are several other potential catalysts. Gilead will report rheumatoid arthritis drug study results later this year, and next year. It is developing cancer therapies discovered by Kite Pharma, which Gilead bought last year. It is enrolling patients for the study of an ulcerative colitis therapy. A wild card catalyst that could strike out of the blue: acquisitions in NASH and oncology. Gilead has the balance sheet to fund the takeovers.
Near term, Gilead shares could trade up into quarterly earnings due out in the last week of July, believes Yee. Gilead disappointed in the first quarter, but it may have gotten back on track in the second quarter. Better HIV drug sales may have helped. “The growth story for HIV has really taken over from where we were with HCV,” said CEO John Milligan at the Jefferies conference in June.
Yee says buy now before others catch on. “Right now Gilead is a value stock, and quite frankly not a lot of value investors have been looking at it,” he says. “Our call is buy the stock before Gilead grows again and the growth investors come in, as people realize it is not a bad story anymore.”
Esperion Therapeutics
Stock: Down 55% from February highs.
It’s never good news when patients die in drug studies. Above all, this is a tragedy for patients and their families. But patient deaths may also lower the odds of drug approval.
However, that’s not always the case. A big challenge for drug researchers is that they often conduct studies on patients who are elderly, quite ill and suffering from a variety of ailments. These are high-risk groups of people. So an elevated death rate can’t necessarily be blamed on the drug being studied.
That’s Esperion Therapeutics’ ESPR, +1.79% explanation for the slightly elevated death rate among patients getting its cholesterol drug compared to a placebo group, in recent studies. This is the issue that knocked the stock down in April.
Esperion’s cholesterol drug is called bempedoic acid. It’s testing the drug for use on its own, and also in combination with an approved cholesterol drug called Ezetimibe. Results from three late-stage studies have been promising.
That’s good news for the 13 million Americans whom the company says can’t hit their cholesterol targets by using statins or Ezetimibe, or who can’t get access to more expensive therapies delivered by injection. This raises their risk for cardiovascular disease, the number one killer in the U.S.
Based on positive study results, Esperion thinks it can submit new drug applications in the U.S. and Europe no later than next March 31. The therapy would fill a big gap in LDL-cholesterol treatment.
But investors aren’t so sure. They’re concerned about the slightly elevated death rate for patients getting Esperion’s drug in one study. At the Jefferies health-care conference, Esperion offered a compelling defense, in four parts.
1. The number of deaths among patients using its drug wasn’t that much higher than placebo group deaths. It was 0.5% vs 0.2%, or 14 deaths out of 2,688 patients compared with two deaths out of 1,338 patients.
2. The patients who died were high risk. They died from cardiovascular problems and lung cancer. Virtually all of the participants had already had bouts of cardiovascular problems or cancers. More than half were smokers, or ex-smokers.
3. The company has shared all study data with the Food and Drug Administration (FDA), and the FDA’s data safety-monitoring board. The board said Esperion can continue studies without changes. “That’s probably a positive,” says Yee.
4. Esperion has been negotiating with potential partners, and they aren’t put off by the patient deaths. “They are definitely putting these in the ‘spurious results’ category, as we are,” said Esperion CEO Tim Mayleben at the Jefferies health-care conference. To sum up, he said the controversy “leaves us, honestly, scratching our heads.”
Concerns about the drug and the company’s stock decline could both reverse soon — in August or September. That’s when more study results come out, which could show the drug is safe, as the company believes. Esperion also has a drug-application meeting with the FDA sometime this fall that might add some clarity on the FDA’s thinking about the safety issues.
Ultimately, FDA approval is what will settle the issue here. No one knows if that will be the outcome, but it seems plausible. At least Esperion has the cash to keep the lights on between now and then. As of the end of March, Esperion had $240 million in cash, which it says is enough to fund the company through approval.
