Biotech companies can offer some of the most explosive returns for an investor. Small-cap biotech companies are known to shoot up 100% overnight and also to dump 50% in an instant as well. Why is this the case? Well, these companies are highly innovative but have an extremely risky business model. They are highly dependent on receiving successful clinical results and Food and Drug Administration (FDA) approval for their products. Of course, these are no guarantee.
With the S&P 500 up over 18% in the past year, it seems that the market is back in a bull run. While it certainly might be, investors should be extra cautious when buying biotech companies because of their great risk. Many of these companies are on the brink of potential collapse. In this article, we will highlight three biotech companies to stay away from that are just not worth your money in a booming market.
Novavax (NVAX)
Novavax (NASDAQ:NVAX) is a biotechnology company specializing in creating vaccines against serious infectious diseases globally. Despite gaining traction during the pandemic through commercializing a Covid-19 vaccine, its share price has begun to plummet due to issues on long-term sustainability.
Novavax’s share price currently sits at $7.13, falling from its highs in 2021 and 2022 of $150-$200. Despite some investors’ optimism about the upcoming FDA approval for Novavax’s Covid booster shot, there are still some glaring issues with this company.
While Novavax’s gross profits have been slightly improving in the past years, it is still operating at net losses. Operating margins remain around -30% and earnings per share (EPS) for the last 12 months sits at a disappointing -7.03.
With many prominent companies already having secured FDA approval for their vaccines, there is uncertainty as to how much demand there will be for Novavax’s. Indeed, the total addressable market (TAM) is becoming more and more saturated.
Looking at its valuation, we see that Novavax is actually relatively undervalued, compared both to its historic values and its peers. Seeking Alpha reports price-to-sales (P/S) of 0.37x compared to its sector median of 3.84. We also find that its price-to-earnings (P/E) (while negative) is sitting near -1x. Nonetheless, I don’t believe these values are not fully indicative of an attractive valuation.
While some investors may see it as a potentially discounted opportunity, I maintain my belief that until I see stronger financials and a more definite catalyst to differentiate it from other companies, investors should dump this downward-spiraling stock.
Bionano Genomics (BNGO)
Bionano Genomics (NASDAQ:BNGO) is a biotechnology company that specializes in optical genome-mapping solutions. These solutions are used for genetic research to better understand diseases. Despite some recent positive news, such as receiving National Medical Products Administration (NMPA) approval in China, the stock has shown signs of instability. The stock is down more than 83% in the last year.
The main issue is that the company just isn’t profitable and has no signs of achieving this in the near future. Last year, the company reported earnings of -$4.58. This is extremely concerning, as revenue has more than tripled in the last five years and the company is still reporting deep losses.
Analysts expect the company to still be putting up losses even a couple of years down the road. With the market being too niche and signs of profitability in the distant future, there is no reason to touch this stock. The company’s recent struggles, coupled with its CFO transition, make it a risky investment.
Nano-X Imaging (NNOX)
Nano-X Imaging (NASDAQ:NNOX) is an Israeli-based medical imaging company. It seeks to democratize access to X-ray machines by using nanotechnology to create lightweight and mobile X-ray devices. Its stock price currently sits at $6.44, a stark drop from its high of almost $22 in July 2023. While Yahoo Finance analysts are projecting optimistic price targets between $14.50 to $34, the company has quite a few red flags.
In its 20-F (the foreign equivalent of 10-K filing), we noticed that its recent acquisitions have left Nano-X with disastrous financials, most notably its negative gross profits. In December 2022, the company reported almost -$7 million in gross profit, worsening from its -$1.5 million gross profit in 2021. And, despite its goals to finalize deployment of the 15,000 Nanox Systems by 2024, we still can’t be certain if Nano-X can sell the systems for more than they cost. Until we see revenues, I suggest investors stay wary of this company.
Finishing up with a quick glance at Nano-X’s valuation, we immediately see an excessive valuation that is seemingly only propped up by its most loyal of investors. With a trailing P/S of 36x compared to its industry median of 3.52x, this stock is certainly overvalued. Until this company can reach a more reasonable valuation and stable metrics, I highly advise all investors to stay away from this ticking time bomb.
On the date of publication, Ian Hartana and Vayun Chugh did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
