In 2019, tiny Axsome Therapeutics (NASDAQ: AXSM) emerged from the obscurity of micro-caps to become the best performing stock in the market, increasing an incredible 3,600% in one year. In 2020, another small biotech, Novavax (NASDAQ: NVAX), came out of nowhere to trample the stock market, its share price skyrocketing 2,700%. For most of 2021, another small biotech was the top performing stock in the market as Cassava science (NASDAQ: SAVA) fell from less than $ 7 a share in January to $ 123 a share on August 24. (Whether it will keep its lead is another question, as volatility is wild – the stock fell to $ 52 on Friday morning after a citizen petition against the company was announced.)
What’s fascinating about the biotechnology industry in particular is the speed at which it is changing. The industry is known for its incredible price swings – both ways – which can happen overnight. So why is this? Why are biotech stocks in particular so volatile? Why do they continue to dominate the market every year? And what biotechnology stock could – repeat, strength – achieve this feat next year? Let’s take a look at why Axsome, Novavax, and Cassava have increased their zoom over the past few years, and why I think Pieris Pharmaceuticals (NASDAQ: PIRS) has a chance of achieving a similar remarkable performance in 2022.
Biotech winners tend to start tiny
The main reason these stocks have been able to soar so impressively is that all three started out with very small market caps. At the end of 2018, Axsome Therapeutics had a micro-capitalization valuation of $ 85 million. In 2019, Novavax shares fell below $ 1 and the company had to reverse split 1 for 20 in order to keep its shares listed on the Nasdaq. And by early 2020, cassava had barely reached small cap status, with its market cap hovering at $ 240 million.
So the three barn burning stocks started off unloved by the market. Why is a biotech stock so cheap? The most common reason is probably that the market thinks the science of business is bad. Novavax, for example, has experienced a notable failure in its quest for a vaccine against respiratory syncytial virus (RSV). This clinical trial failure sent investors to the exit and sent the stock crater in 2019, when it plunged to $ 4 a share (or $ 0.20 pre-split).
Yet the market has been dramatically wrong about Novavax. While the company’s RSV drug was a failure, Novavax had another drug in clinical trials, a flu vaccine. And this drug was a global drummer. He was doing clinical trials and had beaten the leading influenza vaccines against Sanofi (NASDAQ: SNY) again and again.
In 2019, Novavax had the “bad science” label, but data from another drug said otherwise. Sometimes companies with small market caps actually have compelling drugs that work exceptionally well in clinical trials. If you find such a company, you might want to buy some stock.
Is there enough money for a phase 3 trial?
Having said that, it is not enough to have good science. No one is allowed to market their drugs to the public until this science has been validated in clinical trials and approved by the U.S. Food and Drug Administration – and clinical trials cost a huge amount of money. . So, before investing, it is important to determine whether the biotech has enough cash for a phase 3 trial. If the answer is “no”, the drug is blocked and will not go anywhere.
Many unprofitable biotech companies are solving the money problem by working with Big Pharma. When you see such a collaboration, you can be confident that there is enough money for a Phase 3 trial. However, these arrangements also often mean that the largest pharmaceutical company acquires the rights to the molecule. And it can be like selling your future to pay the bills today.
It is interesting to note that neither Axsome, Novavax nor Cassava have an active collaboration with the leaders of the big pharmaceutical companies. Instead, these three companies chose to own 100% of the rights to their flagship molecules. While the median spend for a Phase 3 trial is $ 19 million, the numbers can vary widely, depending on the size of the patient population. I’d be nervous if a biotech had less than $ 100 million in cash (each has more). There is no doubt that this independent approach is riskier, but also potentially much more rewarding.
Biotech investors often like to see the Big Pharma collaboration – it’s validation of the science, and it takes a lot of financial worries out of small businesses. But if you’re looking for big rewards, you might want to look to biotech companies that are still independent (and have enough money to stay that way).
Can Pieris achieve a miracle in 2022?
Pieris stock is very cheap right now, with a valuation of $ 291 million. (You know a stock is cheap when it might have a 10 bagging while still being considered a small cap!) Is the stock so cheap because its science is bad?
It would probably be more accurate to say that Pieris’ science is unproven. Like many unprofitable biotechs, Pieris does not yet have a drug in phase 3 trials. In fact, we’re still waiting for positive Phase 2 data. So it’s early, and that’s a danger sign. The reason Axsome, Novavax and Cassava have all soared is that the three companies have moved very quickly from an unproven drug to pivotal trials. Pieris is a few years away.
Another major difference is that Pieris has signed several collaboration agreements – with rock, AstraZeneca, and Seagen, among others. In a way, this is good news, because it means that money for clinical trials is not an issue for the company. Any drugs that work will move on to phase 3 trials and beyond. And all of this collaboration adds confidence that the company is on the right track.
Is Pieris sacrificing his future to pay for his present? In my opinion, no. While AstraZeneca now owns the rights to the company’s asthma drug (its flagship molecule), what makes Pieris such an exciting stock is not a specific drug, but the entire platform of the company. company. Pieris owns the rights to all Anticalin proteins, and its library contains over 100 billion of these new molecules. Anticalins are much smaller than antibodies and as such can go where antibodies cannot. AstraZeneca paid a lot of money for the rights to Pieris’ asthma medicine because this Anticalin molecule is small enough to go straight to the lungs.
I love the risk / reward equation for Pieris. If the company’s drugs actually work – we’ll have data on that next year – the stock will increase dramatically. Under its existing collaborative arrangements, Pieris could earn up to $ 9 billion if its Anticalin drugs reach certain milestones. But what will really get the stock off the ground is if / when other pharmaceutical players start making deals to add some of the company’s Anticalin molecules to their pipelines.
How do you rate a whole new class of pharmaceuticals? Well, in 2019 global sales of monoclonal antibodies (mAbs) totaled $ 163 billion. If Pieris partners report positive data on its Anticalin drugs next year, the increase in this stock is huge.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.