Biopharmaceutical Stocks: The Bottoming Process Is Playing Out

Jun. 08, 2022 2:30 PM ETABUS, CFRX, EIGR, ISEE, LLY, PFE, SQZ6 Comments
Leonard Yaffe profile picture
Leonard Yaffe
2.29K Followers

Summary

  • Three weeks ago, I suggested that the severe correction in biopharmaceutical stocks had ended. I expect the bottoming process to be choppy with a bias to the upside.
  • The antecedent cause of the decline was the "Class of 2021 IPOs", which featured many companies with preclinical compounds, yet valuations exceeded $1 billion.
  • This group of companies would not have a commercial product before 2027, suggesting they would require additional funding. With excessive market capitalizations, the equity window was not open.
  • I maintain that there are many stocks that are very attractive at the current time. I find investor sentiment negative and short interests high.

Stethoscope and pen laying on patient information blank

YurolaitsAlbert/iStock via Getty Images

The correction in the biopharmaceutical sector has been dramatic, and all of the cliches apply - the stock market takes the escalator up, but the elevator down, the stock market can remain irrational longer than you can remain solvent, advances and declines always last longer than one would expect. As I recently discussed, the excess speculation of 2021 resulted in many companies going public with preclinical compounds, yet valuations exceeded $1 billion. It was only a question of when as to the bursting of the bubble.

Another cliche is relevant - they threw the baby out with the bathwater. I believe that there are many healthcare stocks worth buying. I have previously highlighted Eli Lilly (LLY), whose obesity franchise, including tirzepatide, is very promising. Lilly also has three earlier stage anti-obesity drugs in clinical trials, one of which, LY3502970, is oral. The role of the healthcare insurers in the use of these drugs will be interesting. It is well known that many adults in the United States are obese, and obesity contributes to a host of chronic conditions, including diabetes, knee osteoarthritis, liver fibrosis and hypertension. However, these diseases are not manifest for several years, and the patient is likely to be covered by a different insurer at that future time. Therefore, insurers may be reluctant to authorize reimbursement, even though in the pre-Medicare population, they are trading patients with each other. If the Novo SELECT study, which is looking at the potential for Wegovy to improve cardiovascular outcomes in more than 17,000 obese patients, is positive, then reimbursement should be more readily forthcoming. An interim readout should occur in 2022.

I have also been recommending Pfizer (PFE), which trades at a P/E of 9x. While Paxlovid and Comirnaty sales may peak in 2022, there is going to be an ongoing need for vaccinations and stockpiled therapeutics. As with influenza, SARS-CoV-2 is a permanent part of the viral landscape. Subsequent mutations will likely be more transmissible but less virulent. Meanwhile, Pfizer has made two acquisitions to diversify its product line and enhance its revenue base.

Regarding smaller cap stocks, I remain impressed with the efforts at SQZ Biotechnologies (SQZ), Contrafect (CFRX), Eiger Biopharmaceuticals (EIGR), Iveric Bio (ISEE) and Arbutus Biopharma (ABUS). I also continue to purchase the picks and shovels companies that are benefiting from the efforts in cell and gene therapies. Overall, I remain impressed with the pharmaceutical research renaissance that should result in more cancers becoming chronic diseases, curative gene therapies and new vaccines.

This article was written by

Leonard Yaffe profile picture
2.29K Followers
I am an MD by background who runs a healthcare hedge fund. I worked as a sell-side medical analyst for 20 years, covering pharmaceuticals, medical devices, PBMs and drug distributors.
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Disclosure: I/we have a beneficial long position in the shares of PFE, LLY, ABUS, EIGR, CFRX, SQZ, ISEE either through stock ownership, options, or other derivatives. 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.

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