Just like every year, biotech investors will be biting their nails over many an FDA decision throughout 2019. There are generally speaking 3 different kinds of risk/reward scenarios in these stocks. There is binary, with the highest risk and highest reward. An approval will make or break the company. The second is the more stable model, where an approval will help out long term but probably not result in a spectacular jump off the bat. On the other hand, a rejection probably won’t take a big chunk out of market cap either. Third, there is the in-between option, where an approval would take the company a significant step higher, but it is not existentially dependent on a green light. Here I cover one example from each of these three paradigms for 2019.
Nektar Therapeutics (NKTR) is the binary biotech example for 2019. It isn’t completely binary in the sense that an FDA rejection would be the end of the company, but it would damage it significantly for a long time. Nektar still has plenty of cash, so it will live on. In any case, this stock was the darling of 2017, returning 368.7% on positive news surrounding its drug candidates NKTR-181 for chronic back pain and NKTR-214 immunotherapy cancer treatment in combination with Bristol-Myers Squibb’s (BMY) Opdivo. Disappointing Phase II data for the latter though brought the stock back down to Earth falling 45% in 2018. Now Nektar is the subject of a possible class action lawsuit involving NKTR-214 and how the company has allegedly oversold the usage/possibilities of its leading drug.
Nektar has also had headwinds from a macroeconomic development, where the domestic market has come off the worst December performance since the 1930s. The change in investor preference towards profitability rather than prospects or strictly top-line growth has shied speculators away from Nektar, arguably preventing shares from climbing back up.
However, 2019 could be the saving grace for Nektar, as NKTR-181 is up for review at the end of May. The FDA response to this drug will swing the company wildly in either direction. Nektar describes NKTR-181 as: “…the first long-acting, selective mu-opioid agonist designed to provide potent pain relief without the inherent high levels of euphoria which lead to abuse and addiction with standard opioids.” The FDA has fast-tracked this drug and if the results are successful, it can have an immediate impact on dealing with opioid abuse and a feasible substitute for the current drugs on the market. This will be a major binary event for 2019 and will get a lot of coverage. The upside is in the triple digits, and the downside could be 60-70%.
If NKTR-181 fails, then the value of Nektar will hinge almost entirely on NKTR-214, which is featured in 6 of the company’s 12 clinical pipeline candidates. It would then become a truly binary company.
Merck (MRK) is the safer bet on an FDA approval, with upside in the low double digits but not much long-term downside if any. It is currently riding a wave of momentum based on the results and ongoing approvals for its wonder drug Keytruda. This drug has proven to increase survival rates and longevity with lung cancer and has been expanded to treat other cancers, and could be expanded to treat even more this year. I would argue that much of Merck’s escape from the current volatility in the broader markets has to do with the continued prospects for Keytruda. Prudent financial decisions in the past have certainly contributed to Merck’s current stability, but now I believe Merck is riding a wave of anticipation for Keytruda approvals in 2019.
In February, approval for melanoma is up for review and if this result is positive, then Merck will likely coast through 2019 regardless of the broader economic picture, not strictly because of a melanoma approval, but for what that approval would portend for future approvals for Keytruda. In the worst case assuming a melanoma rejection, I believe Merck shares would initially fall but then stabilize and climb back up to current levels eventually, which provides investors with a capital preservation option if things turn south this year for stocks generally.
On the flipside, Merck rivals such as Bristol-Myers Squibb and Pfizer (PFE) could see their stocks negatively impacted because this approval could negatively impact their current/future expected cash flows from competitors to Keytruda.
Jazz Pharmaceuticals (JAZZ) is a mid-cap biotech that had phenomenal returns in 2017 (23.5%), but the company has slightly underperformed the S&P 500 in 2018. JZP-110 is a drug that treats excessive sleepiness that was initially up for an FDA decision in December 2018 but was pushed to March. This is an opportunity that could have a significant positive impact on its sales pipeline as we head into a period with subdued growth expectations across the board. JZP-110 is broadly expected to achieve peak sales of about $400M annually, which would expand Jazz’s quarterly top line from current levels by about 25%. It would be the company’s second-best seller behind Xyrem. On approval, Jazz could move up a tier and find a new plateau.
To a degree, Jazz shares are hostage to wider market conditions; however, short-term charts are a bit misleading as to the degree. Shares moved down sharply when the FDA postponed its review until March, which also happened to be at the time that the current market decline began to take hold. So to a large degree, there is still an FDA-postponement discount for Jazz and shares could move back up to near highs at $184, for gains of about 43%, if JZP-110 is approved. If not, and market conditions continue to deteriorate, we could see a move to below $100 and possibly lower.
Disclosure: I am/we are long MRK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.