One would think that the biotechnology sector is immune from trade tensions, but that is not the case. Biotech stocks are very much prone to selloffs during heightened global insecurity. In general, U.S-China trade tensions have derailed investor confidence. Growth sectors filled with unproven businesses, such as biotechs, have been hurt the most as uncertainty is anathema to investors during downturns.
In particular, tariffs and trade barriers will raise prices for consumers and crimp economic output. Add the government scrutiny over drug prices and the desire for Medicare for all, and suddenly the prospects worsen for biotech companies.
If the U.S. government does not make progress toward changing the drug development and approval process, drug prices will not fall as much as investors fear. Investors could pick the most established drug companies or those with strong prospects but do not yet have a product on the market.
There are five biotech stocks investors could buy despite the scrutiny weighing on the sector.
Biotech Stocks to Buy: Allergan (AGN)
Markets are scrutinizing the leadership of CEO Brent Saunders. A group of activist shareholders tried but failed to change the executive team. In many ways, Allergan (NYSE:AGN) management is disappointing investors in executing its turnaround and growth plan. The company reported first-quarter net revenue of $3.6 billion, down 2% from last year. Without exchange rate adjustments, core growth would have been up 4.4% Y/Y.
Net income grew just 1.3% from last year to $3.79 a share. The company is committed to deploying capital to improve shareholder value. It bought back $800 million of its shares and has another $2 billion left in the plan. It cut net debt/EBITDA to 2.8 times and it increased its dividends by 3% to 74 cents a share.
Headwinds: The breast implant regulatory changes hurt its Natrelle line. Though a drop in textured implant sales is a headwind, 90% of Allergan’s business is with smooth implants. Five approvals over the next 18 months could offset that business plus weak Alloderm and Coolsculpting revenue. The company expects approval for Cariprazine, Abicipar, Bimatoprost SR, Ubrogepant and CoolTone next.
Competition for Botox is still a worry but the company reported revenue of $868 million, up by a healthy 9%, from last year’s levels. Even if competition heats up, Allergan benefits from brand recognition and an established customer base. As it improves the product, the company may potentially maintain its market share in 2019.
Regeneron Pharmaceuticals (REGN)
Regeneron (NASDAQ:REGN) fell sharply lower from $400 to around $325 in recent weeks. Selling pressure on its shares accelerated after the company reported first-quarter results. Earnings fell 3.5% while revenue rose 13.3%. Before the report, REGN stock traded at a P/E in the high teens on expectations that the company would sustain the 26% annual growth reported over the last five years.
Skepticism over Praluent and Eylea sales growth caused investors to re-evaluate the company’s growth potential. Conversely, its atopic dermatitis drug generated $374 million in quarterly sales, helped by the sequential prescription growth of 18%. An expanded indication of the drug for adolescents and children will accelerate revenue. Markets are ignoring the potential of Dupixent becoming the biggest revenue contributor to the business in the next 2-3 years. The company also received approval for treating asthma, which will further drive sales.
Recent Developments: Regeneron is spending plenty of developing drugs to treat cancer. And it has four to six new molecules that it expects will advance to the clinical stage this year. This is on top of the five molecules that advanced in 2018.
Staff hiring and higher SG&A costs hurt profits in the quarter but should benefit the company’s bottom line in the near future. Regeneron needs to spend more to support Dupixent for asthma and for the Libtayo launches. Looking ahead, lower promotional costs and higher staff efficiency should lead to higher profits. With REGN stock now at 16 times earnings, investors should take another look at this beaten down stock.
XBiotech Inc. (XBIT)
Still trading in an uptrend that began last Sept. 2018, XBiotech (NASDAQ:XBIT) is worth another look. On Mar. 1, the company, which is effectively a potential competitor to Regeneron, reported breakthrough results. In its Phase 2 trial of Bermekimab for treating atopic dermatitis, XBiotech demonstrated high efficacy for subjects. The company posted that:
After only seven weeks of treatment, 71% of patients that received a 400mg bermekimab weekly regimen had at least 75% reduction in their disease.
Further, the company wrote:
“Within 7 weeks, using [the] patient reported Numerical Rating Scale (NRS) for itch and pain, patients receiving the 400mg bermekimab treatment regimen had 71% reduction in itch and an 84% reduction in pain.”
XBiotech is clearly a contender in the eczema space. If it is an eventual competitor to Regeneron, why should investors consider this stock too? XBiotech is valued with a market capitalization of just $342 million. At that level, it could attract a suiter. More clinical results that reaffirm the drug’s positive results could also drive the share price higher.
In its third-quarter report, XBiotech had $20.85 million in cash and reported a GAAP EPS of a loss of 14 cents. The cash on hand should cover the clinical study costs in the near-term. As the company gets closer to applying for approval, the market may grow more bullish on its stock.
Dermira Inc. (DERM)
Dermira (NASDAQ:DERM) is also developing a drug in the atopic dermatitis space. Its market cap of $571 million is still above that of XBiotech. It would have been higher if the stock did not peak at $15 in early April, only to trade at $10.70 recently.
The company launched Qbrexza, a product for treating excessive sweating, seven months ago. Investor interest grew when the company posted Phase 2b data for Lebri in March. Although Regeneron’s Dupixent targets IL-4 and IL-13, Lebri targets IL-13 only. The company believes that IL-13 is the central pathogenic mediator associated with the AD pathophysiology. So if its drug treats the skin barrier dysfunction, the patient itch is reduced and skin infection complications averted.
Dermira is finalizing its plans for the Phase 3 study and will meet with the FDA by mid-year. The study will potentially start by the end of 2019.
First-Quarter Results: DERM stock fell after the company reported a GAAP EPS loss of $1.49. It generated revenue of $2.45 million. These figures have little meaning at this time because the stock’s valuation depends on the clinical trial results for Lebri. For now, revenue growth will depend on Qbrexza prescriptions. Expect strong sales momentum: on the company’s website, page views topped 50,000 unique weekly visitors. As the company accelerates brand awareness through advertising, the market share for Qbrexza will continue growing.
CRISPR Therapeutics AG (CRSP)
Continuing on the theme of biotechnology stocks in the development phase, investors should consider buying CRISPR Therapeutics AG (NASDAQ:CRSP) as shares continue to rebound. The stock fell to as low as $22 last Dec. 2018 but climbed steadily throughout this year. CRSP stock traded recently at $39.10.
The company’s mandate is to create transformative gene-based medicines for serious diseases. The company has roots in developing a treatment for sickle cell but is expanding its market. In April, the FDA designated its therapy candidate CTX001 for fast track review. Together with its partner, Vertex Pharmaceuticals (NASDAQ: VRTX), the drug, used for the treatment of transfusion-dependent beta thalassemia (TDT), could get to market sooner with the fast track.
In February, the company announced that the first patient had been treated with CTX001 in a Phase 1/2 clinical study of patients with TDT. Enrollment for the study is ongoing.
CRSPR’s next-generation of I/O cell therapy will have two characteristics. First Allogeneic CAR-T will be off-the-shelf and will have more potent starting material. Second, it will have solid tumor efficacy. The benefits include targeting tumors with greater selectivity, avoiding exhaustion, and modulating suppressive TMEs (tumor microenvironments).
First-Quarter Results: CRISPR reported a Q1 GAAP EPS loss of 93 cents. As a company still in the product development stage, investors need not be concerned. What is important is its cash balance of $437.5 million in cash as of March 31, 2019. With plenty of funds available to cover R&D costs, the company is unlikely to issue shares in the near-term.
As of this writing, the author did not hold a position in any of the aforementioned securities.