Date: 6/29/2022
Author: Mr. X
With Federal Reserve Chairman Jerome Powell defining his job as “literally” preventing the transition to a “higher inflation regime,” growth stocks and tech may be in trouble. Without access to cheap capital, clean energy companies, metaverse plays, and cryptocurrency don’t look so attractive. Cryptocurrency is facing nothing less than an existential test about whether the sector will even survive.
However, over the last few days, there have been some spectacular one-day gains when it comes to biotech. Here, the same rules apply regardless of the liquidity crunch – a biotech stock lives or dies by clinical test results.
Trevi Therapeutics Inc [TRVI] ended yesterday’s trading day up over 20%. Its “Haduvio” treatment showed positive results in a trial for pruigo nodularis.
Decibel Therapeutics Inc [DBTX] was up an astonishing 44% after DB-02, a drug designed to prevent hearing loss in cancer patients undergoing chemotherapy, showed positive result. There might be much farther to go – Citi reportedly has a $15 target price on the stock, though its current price is still below $4.00.
Agile Therapeutics [AGRX] lost ground yesterday but it is still up close to 39% over the last five days. Its “Twirla” contraceptive transdermal delivery system was approved by the FDA in 2020, but it received a second look from investors after the Roe v. Wade decision was overruled. Contraceptive devices and treatments may become far more important as a result.
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Three other biotech stocks that may be worth examining are Seelos Therapeutics [SEEL], Amylyx Pharmaceuticals [AMLX], and Vertex Pharmaceuticals [VRTX]. Each contains a certain measure of risk, but these are listed from lowest to highest risk profile, in my own opinion.
The high risk, high reward stock is Seelos Therapeutics. SEEL has been having a brutal 2022, losing more than 57% over the last six months. However, SEEL was up more than 6% yesterday.
SEEL recently reported positive results for its drug SLS-004, a gene therapy treatment for dementia with Lewy bodies. This disease currently has no cure. More data is reportedly coming later this year on this drug. The same drug is also being tested in relationship to Parkinson’s Disease.
Seelos has also begun dosing with SLS-005, one of the drugs being tested in the historic HEALEY ALS trial. The drug may also prove useful in Huntington’s Disease, a condition that is all but untreatable today.
Still, that may not be the drug that pushes the company into the mainstream. SLS-002, a ketamine treatment, could prove vital in treating major depressive disorder among patients with an imminent risk of suicide. SLS-003, another ketamine approach, could potentially treat hard-to-pin down conditions such as neurological pain and Complex Regional Pain Syndrome (CRPS.)
This is massive breakout potential… so what’s been the problem?
Seelos has received some downgrades over the last few years, including from Roth Capital in May 2021 and Cantor Fitzgerald earlier this month. Instead of targets around $12 a share, estimates are now centering around $4.00 a share. That’s still much higher than its current position, but SEEL represents a real risk.
Following public outrage after the FDA approved Aduhelm from Biogen [BIIB], the FDA has been more cautious about drug approvals. If any of SEEL’s drugs fall short in clinical trials or simply can’t make it to marketplace quickly enough, gun-shy investors will flee for cover. SEEL has the opportunity for truly transformative gains – but there is a lot of risk and everything depends on clinical trial results.
The picture is slightly less risky for Amylyx Pharmaceuticals [AMLX]. AMLX is another company developing an ALS treatment. It was down by almost 8% yesterday and has been largely sideways over the last six months. The key for AMLX is that Canada has already approved its treatment for ALS, ALBRIOZA or AMX0035.
The drama here is that the FDA has postponed its decision about whether to approve AMX0035 in the States until September. The therapy lost a committee vote on its effectiveness in March – though only by one vote. The extra time will allow the company to provide additional data to change the FDA’s mind.
AMX0035 is a combination of two drugs with a largely benign safety record. AMX0035 is also backed by a vocal and desperate patient lobby, as the relentlessly progressive and invariably fatal ALS has few effective treatments and no cure. However, it’s the fact that the FDA committee voted against approval despite all this that should give investors caution. There’s time to wait here, and investors may wish to see a pullback to about $15 before re-entering. Yet with AMLX, even more than with biotech stocks, situational awareness is key. This is essentially an all-or-nothing bet on one drug, albeit one that has already gotten the green light up north.
Finally, there’s a more defensive, traditional play for biotech. This would be Vertex Pharmaceuticals [VRTX]. VRTX has a potential growth market in a treatment for Type 1 Diabetes, as the company is testing replacements for pancreatic cells. However, the FDA paused a study because of concerns over dosage in May, reportedly surprising the company. Yet the company is still presenting data on conventions, clearly expecting eventual approval and a relatively swift rollout.
This is critical because VRTX already has a sizable list of products, especially when it comes to the cystic fibrosis market. Its P/E ration still looks somewhat reasonable, even after the company has gained over 26% over the last six months. Critically, the company is moving to further establish its dominance in this sector by creating a cystic fibrosis treatment that’s even better than its dominant Trikafta drug.
Biotech always contains risk. A failed trail can mean a terrifying decline or even the end of the company. Yet in a shrinking economy, biotech presents a few key advantages and is one of the few sectors where quick, life-changing gains are still possible within a matter of days.
Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for RogueInvesting.com to bring you news on what those with power are debating, planning, and doing.
