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4 Small Drug Stocks That Hold Promise Despite Industry Challenges
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Sales of some drugs/vaccines/products are expected to have been hurt by business disruption due to COVID-19 in the third quarter despite an ongoing recovery from the earlier impacts of the pandemic.
Though regulatory/pipeline updates related to COVID-19 medicines/vaccines have taken center stage this year as well, the sector has been witnessing developments in other innovative pipeline areas. Overall, successful innovation resulting in new drug/product approvals, important advances in clinical studies, and strategic collaborations with strong partners have kept companies like Xencor (XNCR - Free Report) , Enanta Pharmaceuticals (ENTA - Free Report) , Catalyst Pharmaceuticals (CPRX - Free Report) and Molecular Templates (MTEM - Free Report) afloat.
Industry Description
The Zacks Medical-Drugs industry comprises small drug companies which make medicines for both human and veterinary use. We have a separate industry outlook discussion on some of the biggest drugmakers in the world. Most of the small drugmakers have a limited portfolio of marketed drugs or no commercial-stage drugs at all. Some of these drugmakers are dependent on just one marketed drug or pipeline candidate. For such companies, upfront or milestone payments from collaboration partners — in most cases their larger counterparts — are the main source of revenues. They, therefore, need ample free cash flow to fund their research and development activity.
Factors Shaping the Future of the Medical-Drugs Industry
Pipeline Success: The success or failure of key pipeline candidates in clinical studies can significantly drive the stock price of the industry players. Successful innovation and product line extensions in important therapeutic areas and strong clinical study results may act as important catalysts for the stocks.
Strong Collaboration Partners: These companies regularly seek external partners and collaborators for complementary strengths. A partnership deal with a popular drugmaker is a good sign about the potential of small pharma companies, especially when an equity investment is included in the deal. M&A activity significantly slowed down in 2020, mainly due to the impact of the coronavirus pandemic. Nonetheless, M&A activity picked up again in 2021 as healthcare activity gradually became more normal.
Investment in Technology for Innovation: For these smaller companies, succeeding in a shifting global market and evolving healthcare landscape requires adopting innovative business models, investing in new technologies, and increasing investments in personalized medicines. Over the past few years, scientific and technological advancements have made it possible to develop personalized therapies. Other than that, adoption and information exchange through meaningful use of health IT, development of therapies that improve overall patient outcomes and investment in developing and emerging markets are some of the new priorities for drug companies, going forward.
Pipeline Setbacks: The smaller companies have their share of risk in the form of unstable cash flows. Also, the failure of key pipeline candidates in pivotal studies and regulatory and pipeline delays can be huge setbacks for these smaller companies and significantly hurt their share price in the future.
Zacks Industry Rank Indicates Uncertainty
The group’s Zacks Industry Rank is basically the average of the Zacks Rank of all the member stocks.
The Zacks Medical-Drugs industry currently carries a Zacks Industry Rank #173, which places it in the bottom 31% of 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. The industry’s earnings estimates for 2022 have moved down 116.7% over the past year.
Despite the bleak near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Lags S&P 500 and Sector
The Zacks Medical-Drugs industry is a huge 226-stock group within the broader Medical sector. The industry has underperformed the S&P 500 and the Zacks Medical sector this year so far.
Stocks in this industry have collectively declined 15.6% this year so far, while the Zacks S&P 500 composite has risen 22.5%. The Zacks Medical sector has declined 6% in the said time frame.
Industry's Current Valuation
On the basis of the trailing twelve months price-to-sales ratio (P/S TTM), which is a commonly used multiple for valuing these small drugmakers, the industry is currently trading at 2.16 compared with the S&P 500’s 5.14 and the Zacks Medical sector's 2.72.
Over the last five years, the industry has traded as high as 4.40X, as low as 1.76X, and at the median of 2.48X, as the chart below shows.
4 Small Drug Stocks to Keep an Eye On
Xencor: This California-based biotech focused on making medicines for cancer and autoimmune diseases has a Zacks Rank #1 (Strong Buy). Loss estimates for 2021 have improved from 75 cents per share to 33 cents per share over the past 60 days. The stock has declined 11% this year so far.
At present, several candidates engineered with Xencor's XmAb technology are being developed in clinical studies either by Xencor itself or by its partners. In the third quarter, it initiated a phase II study for XmAb717, its PD-1 x CTLA-4 bispecific antibody, in metastatic prostate cancer, and plans to begin a phase II study of plamotamab in lymphoma. In 2022, it plans to initiate clinical studies for XmAb808, a B7-H3 x CD28 bispecific antibody, as well as its third clinical cytokine program, an IL-12-Fc candidate. In May, the FDA granted emergency approval to Xencor's partner Vir Biotechnology's COVID-19 antibody drug, sotrovimab (VIR-7831), developed utilizing Xencor's Xtent technology. Sotrovimab is the third antibody incorporating XmAb technology to be made commercially available for patients.
Price and Consensus: XNCR
Enanta Pharmaceuticals: This Watertown, MA-based company makes molecule drugs for viral infections and liver diseases. The stock has risen 78.8% this year so far. The loss estimates for 2021 have narrowed from $4.32 per share to $3.88 per share over the past 60 days. Enanta has a Zacks Rank of 2 (Buy).
Enanta is developing EDP-235, an oral protease inhibitor specifically designed to treat COVID-19. A phase I study on the candidate is expected to begin in early 2022. It also recently begun a phase I study on EDP-721, its oral HBV RNA destabilizer, which it believes has the potential to become an important component of an all-oral, functional cure for chronic HBV. It also announced positive data from two phase Ib studies of core inhibitor EDP-514, one in chronic HBV patients already being treated with a nucleoside reverse transcriptase inhibitor and the other in viremic patients not currently on treatment.
Price and Consensus: ENTA
Catalyst Pharmaceuticals: Coral Gables, FL-based Catalyst Pharmaceuticals develops and markets therapies targeting rare neurological diseases and disorders such as LEMS, epilepsy (initially infantile spasms) and Tourette syndrome. Catalyst's lead drug, Firdapse is approved to treat adult patients with Lambert-Eaton Myasthenic Syndrome (LEMS), an ultra-rare disease. The drug has witnessed a solid uptake so far since its launch in January 2019. Catalyst's efforts to develop Firdapse for other rare neuromuscular indications are impressive too.
The stock has risen 74% this year so far. The consensus loss estimate for 2021 has remained stable over the past 60 days. The company has a Zacks Rank #2.
Price and Consensus: CPRX
Molecular Templates: This specialty pharmaceutical company develops and commercializes next-generation immunotoxins called Engineered Toxin Bodies for the treatment of cancers and other serious diseases. Though this Zacks Rank #2 stock has declined 41.2% this year so far, its loss estimate for 2021 has narrowed from $1.40 per share to $1.38 per share over the past 60 days.
The company is rapidly advancing its wholly-owned pipeline of next-generation ETBs. It initiated clinical development of MT-6402 (targeting PD-L1 via dual mechanisms) in July. MT-6402 is the first of Molecular Templates third-generation ETBs to enter the clinic. It expects clinical data from studies on its pipeline candidates, MT-5111 (HER2-positive cancers - phase I), TAK-169 (relapsed/refractory multiple myeloma -phase I), and MT-6402 in the fourth quarter of 2021. In August, it assumed full rights to TAK-169 from its former co-development partner, Takeda.
Price and Consensus: MTEM
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4 Small Drug Stocks That Hold Promise Despite Industry Challenges
Sales of some drugs/vaccines/products are expected to have been hurt by business disruption due to COVID-19 in the third quarter despite an ongoing recovery from the earlier impacts of the pandemic.
Though regulatory/pipeline updates related to COVID-19 medicines/vaccines have taken center stage this year as well, the sector has been witnessing developments in other innovative pipeline areas. Overall, successful innovation resulting in new drug/product approvals, important advances in clinical studies, and strategic collaborations with strong partners have kept companies like Xencor (XNCR - Free Report) , Enanta Pharmaceuticals (ENTA - Free Report) , Catalyst Pharmaceuticals (CPRX - Free Report) and Molecular Templates (MTEM - Free Report) afloat.
Industry Description
The Zacks Medical-Drugs industry comprises small drug companies which make medicines for both human and veterinary use. We have a separate industry outlook discussion on some of the biggest drugmakers in the world. Most of the small drugmakers have a limited portfolio of marketed drugs or no commercial-stage drugs at all. Some of these drugmakers are dependent on just one marketed drug or pipeline candidate. For such companies, upfront or milestone payments from collaboration partners — in most cases their larger counterparts — are the main source of revenues. They, therefore, need ample free cash flow to fund their research and development activity.
Factors Shaping the Future of the Medical-Drugs Industry
Pipeline Success: The success or failure of key pipeline candidates in clinical studies can significantly drive the stock price of the industry players. Successful innovation and product line extensions in important therapeutic areas and strong clinical study results may act as important catalysts for the stocks.
Strong Collaboration Partners: These companies regularly seek external partners and collaborators for complementary strengths. A partnership deal with a popular drugmaker is a good sign about the potential of small pharma companies, especially when an equity investment is included in the deal. M&A activity significantly slowed down in 2020, mainly due to the impact of the coronavirus pandemic. Nonetheless, M&A activity picked up again in 2021 as healthcare activity gradually became more normal.
Investment in Technology for Innovation: For these smaller companies, succeeding in a shifting global market and evolving healthcare landscape requires adopting innovative business models, investing in new technologies, and increasing investments in personalized medicines. Over the past few years, scientific and technological advancements have made it possible to develop personalized therapies. Other than that, adoption and information exchange through meaningful use of health IT, development of therapies that improve overall patient outcomes and investment in developing and emerging markets are some of the new priorities for drug companies, going forward.
Pipeline Setbacks: The smaller companies have their share of risk in the form of unstable cash flows. Also, the failure of key pipeline candidates in pivotal studies and regulatory and pipeline delays can be huge setbacks for these smaller companies and significantly hurt their share price in the future.
Zacks Industry Rank Indicates Uncertainty
The group’s Zacks Industry Rank is basically the average of the Zacks Rank of all the member stocks.
The Zacks Medical-Drugs industry currently carries a Zacks Industry Rank #173, which places it in the bottom 31% of 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. The industry’s earnings estimates for 2022 have moved down 116.7% over the past year.
Despite the bleak near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Lags S&P 500 and Sector
The Zacks Medical-Drugs industry is a huge 226-stock group within the broader Medical sector. The industry has underperformed the S&P 500 and the Zacks Medical sector this year so far.
Stocks in this industry have collectively declined 15.6% this year so far, while the Zacks S&P 500 composite has risen 22.5%. The Zacks Medical sector has declined 6% in the said time frame.
Industry's Current Valuation
On the basis of the trailing twelve months price-to-sales ratio (P/S TTM), which is a commonly used multiple for valuing these small drugmakers, the industry is currently trading at 2.16 compared with the S&P 500’s 5.14 and the Zacks Medical sector's 2.72.
Over the last five years, the industry has traded as high as 4.40X, as low as 1.76X, and at the median of 2.48X, as the chart below shows.
4 Small Drug Stocks to Keep an Eye On
Xencor: This California-based biotech focused on making medicines for cancer and autoimmune diseases has a Zacks Rank #1 (Strong Buy). Loss estimates for 2021 have improved from 75 cents per share to 33 cents per share over the past 60 days. The stock has declined 11% this year so far.
At present, several candidates engineered with Xencor's XmAb technology are being developed in clinical studies either by Xencor itself or by its partners. In the third quarter, it initiated a phase II study for XmAb717, its PD-1 x CTLA-4 bispecific antibody, in metastatic prostate cancer, and plans to begin a phase II study of plamotamab in lymphoma. In 2022, it plans to initiate clinical studies for XmAb808, a B7-H3 x CD28 bispecific antibody, as well as its third clinical cytokine program, an IL-12-Fc candidate. In May, the FDA granted emergency approval to Xencor's partner Vir Biotechnology's COVID-19 antibody drug, sotrovimab (VIR-7831), developed utilizing Xencor's Xtent technology. Sotrovimab is the third antibody incorporating XmAb technology to be made commercially available for patients.
Price and Consensus: XNCR
Enanta Pharmaceuticals: This Watertown, MA-based company makes molecule drugs for viral infections and liver diseases. The stock has risen 78.8% this year so far. The loss estimates for 2021 have narrowed from $4.32 per share to $3.88 per share over the past 60 days. Enanta has a Zacks Rank of 2 (Buy).
Enanta is developing EDP-235, an oral protease inhibitor specifically designed to treat COVID-19. A phase I study on the candidate is expected to begin in early 2022. It also recently begun a phase I study on EDP-721, its oral HBV RNA destabilizer, which it believes has the potential to become an important component of an all-oral, functional cure for chronic HBV. It also announced positive data from two phase Ib studies of core inhibitor EDP-514, one in chronic HBV patients already being treated with a nucleoside reverse transcriptase inhibitor and the other in viremic patients not currently on treatment.
Price and Consensus: ENTA
Catalyst Pharmaceuticals: Coral Gables, FL-based Catalyst Pharmaceuticals develops and markets therapies targeting rare neurological diseases and disorders such as LEMS, epilepsy (initially infantile spasms) and Tourette syndrome. Catalyst's lead drug, Firdapse is approved to treat adult patients with Lambert-Eaton Myasthenic Syndrome (LEMS), an ultra-rare disease. The drug has witnessed a solid uptake so far since its launch in January 2019. Catalyst's efforts to develop Firdapse for other rare neuromuscular indications are impressive too.
The stock has risen 74% this year so far. The consensus loss estimate for 2021 has remained stable over the past 60 days. The company has a Zacks Rank #2.
Price and Consensus: CPRX
Molecular Templates: This specialty pharmaceutical company develops and commercializes next-generation immunotoxins called Engineered Toxin Bodies for the treatment of cancers and other serious diseases. Though this Zacks Rank #2 stock has declined 41.2% this year so far, its loss estimate for 2021 has narrowed from $1.40 per share to $1.38 per share over the past 60 days.
You can see the complete list of today's Zacks #1 Rank stocks here.
The company is rapidly advancing its wholly-owned pipeline of next-generation ETBs. It initiated clinical development of MT-6402 (targeting PD-L1 via dual mechanisms) in July. MT-6402 is the first of Molecular Templates third-generation ETBs to enter the clinic. It expects clinical data from studies on its pipeline candidates, MT-5111 (HER2-positive cancers - phase I), TAK-169 (relapsed/refractory multiple myeloma -phase I), and MT-6402 in the fourth quarter of 2021. In August, it assumed full rights to TAK-169 from its former co-development partner, Takeda.
Price and Consensus: MTEM