After their second-quarter results were hurt by the coronavirus pandemic, drugmakers are optimistic that demand trends will improve in the back half of 2020. However, there remains uncertainty about the impact of the coronavirus pandemic on business, including supply chain, clinical trials, commercial operations and growth outlook.
Nonetheless, successful innovation resulting in new drug approvals, important advances in clinical studies, and strategic collaborations with strong partners have kept these companies afloat despite the pandemic. Cassava Sciences (SAVA - Free Report) , KemPharm (KMPH - Free Report) Minerva Neurosciences (NERV - Free Report) and Aldeyra Therapeutics (ALDX - Free Report) are well placed to gain from these trends.
The Zacks Medical-Drugs industry comprises small drug companies, including some foreign ones, which make medicines for both human and veterinary use. We have a separate industry outlook discussion for some of the biggest drugmakers of the world. (Read more: Large-Cap Pharma Industry Outlook Dull Amid Coronavirus Woes)
Most of the small drugmakers have a limited portfolio of marketed drugs or in some cases 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. These companies therefore need ample free cash flow to fund their research and development activity.
What’s Shaping the Future of the Medical-Drugs Industry?
Pipeline Success: The success or failure of key pipeline candidates in clinical studies can significantly drive 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 these 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. Though M&A activity slowed down in 2020, collaborations with larger counterparts are expected to continue as the year progresses.
Investment in Technology for Innovation: For these smaller companies, succeeding in a shifting global market and evolving healthcare landscape requires them to adopt innovative business models, invest in new technologies and increase investments in personalized medicines. Over the past few years, scientific and technological advancements have made it possible to develop personalized therapies. 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, 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 Dim Prospects
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 #191, which places it in the bottom 24% 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 2021 have moved down 132% 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 Underperforms Sector & S&P 500
The Zacks Medical-Drugs industry is a huge 170-stock group within the broader Medical sector. The industry has underperformed the S&P 500 as well as the Zacks Medical sector this year so far.
Stocks in this industry have collectively declined 7.6% this year so far compared with the Zacks Medical sector’s decline of 1%. In contrast, the Zacks S&P 500 composite has risen 4.1% in the said time frame.
Industry’s Current Valuation
On the basis of 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 2.13 compared with the S&P 500’s 4.22 and the Zacks Medical sector's 3.06.
Over the last five years, the industry has traded as high as 4.32X, as low as 1.71X, and at the median of 2.56X, as the chart below shows.
4 Small Drug Stocks to Keep an Eye On
Cassava Sciences: is a clinical-stage drug development company, focused on making drugs for nervous system disorders. It recently announced positive data from a phase IIb study on its lead therapeutic product candidate, sumifilam, a small molecule drug, for the treatment of Alzheimer's disease (AD). In the study funded by the National Institutes of Health (NIH), sumifilam significantly improved an entire panel of validated biomarkers of disease in AD patients compared to placebo. The data suggests that sumifilam may be slowing disease progression in AD patients, which offers hope that sumifilam could become a transformative treatment for AD.
The company’s stock price has surged 120.2% this year so far. The consensus estimate for 2021 has improved from a loss of 44 cents to earnings of 86 cents over the past 60 days. The company has a Zacks Rank #2 (Buy).
Price and Consensus: SAVA
Aldeyra Therapeutics: The stock of this company, which makes medicines for immune-mediated ocular and systemic diseases has risen 29.6% this year so far. The consensus estimate for 2020 has narrowed from a loss of $1.52 per share to $1.27 per share for 2020 and from $1.60 per share to $1.26 per share over the past 60 days. The company has a Zacks Rank #2.
Aldeyra’s lead pipeline candidate is reproxalap, a novel topical ocular RASP Inhibitor in late-stage development for the treatment of dry eye disease (DED) and allergic conjunctivitis (AC). The candidate has demonstrated statistically significant and clinically relevant improvements across several studies in DED and AC with an NDA expected to be filed next year. The company expects to begin clinical studies (phase II) on another candidate ADX-629, an orally available RASP inhibitor, for COVID-19, psoriasis, and atopic asthma indications in the second half of 2020
Price and Consensus: ALDX
KemPharm: The stock of this company, which makes proprietary prodrugs has risen 52.9% this year so far. The consensus estimate for 2020 has narrowed from a loss of 22 cents per share to loss of 17 cents per share over the past 60 days. For 2021, the earnings per share estimate has gone up from 12 cents to 18 cents per share over the past 60 days. The company has a Zacks Rank #2.
KemPharm’s new drug application (NDA) for KP415 (a prodrug of methylphenidate) for the treatment of attention deficit/hyperactivity disorder (ADHD) was accepted for review by the FDA in May on a priority basis with a decision expected in March next year. Meanwhile, KemPharm got two U.S. patents governing KP415 and KP484, also a prodrug of methylphenidate. The patents have an expiration date of Dec 9, 2037, which is an extension of approximately five years beyond prior patents on serdexmethylphenidate (SDX), the prodrug contained in KP415.
Price and Consensus: KMPH
Minerva Neurosciences: This Cambridge, MA clinical stage biotech that makes drugs that treat central nervous system diseases has a Zacks Rank of 2. The estimates for 2020 have gone up from loss of $1.08 per share to breakeven over the past 60 days while that for 2021 has improved from a loss of 97 cents to 73 cents per share.
The company’s lead pipeline candidate roluperidone failed to meet its primary endpoint in a phase III study evaluating it to treat negative symptoms in schizophrenia. However, the company believes that though the study did not meet the primary endpoint, the consistency of reduction in overall negative symptoms and the resulting functional improvement support the potential of roluperidone. It intends to meet with the FDA to discuss the next steps. In July, it exercised its right to opt out of its agreement with J&J for the development of seltorexant, thereby retaining a meaningful financial interest in the future revenue stream of a compound with significant commercial potential.
Price and Consensus: NERV