The biotech sector has not been keeping up with the overall stock market uptick, reflecting a slight drop in investor interest. Concerns about the impact of Medicare drug price negotiations, regular pipeline setbacks, Federal Trade Commission’s increasing scrutiny of merger and acquisitions (M&As) in the sector and overall concerns about the economy and inflation could have also played a role in diverting investors away from the sector. Nonetheless, the fundamentals of the sector remain strong and investors will come back to this defensive space eventually.
Overall, we believe that M&A, innovation, a more favorable regulatory environment and insulation from recession concerns shape the biotech sector, keeping stocks like Corcept Therapeutics ( CORT Quick Quote CORT - Free Report) , Aurinia Pharmaceuticals ( AUPH Quick Quote AUPH - Free Report) , Alpine Immune Sciences ( ALPN Quick Quote ALPN - Free Report) KalVista Pharmaceuticals ( KALV Quick Quote KALV - Free Report) and Cardiol Therapeutics ( CRDL Quick Quote CRDL - Free Report) afloat. Industry Description
Medical-Drugs industry comprises small and some medium-sized drug companies, which make medicines for both human and veterinary use. We have a separate industry outlook discussion on big drugmakers. Small drugmakers have a limited portfolio of marketed drugs or no commercial-stage drugs at all. Some 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 need ample free cash flow to fund R&D activities. Factors Shaping the Future of the Medical-Drugs Industry
The success or failure of key pipeline candidates in clinical studies can significantly drive the stock price of 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. Pipeline Success: 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 deals are in full swing in the sector, signaling growth. Strong Collaboration Partners: 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 the meaningful use of health IT, development of therapies that improve overall patient outcomes and investment in developing and emerging markets are some of the key priorities for drug companies. Investment in Technology for Innovation:
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. Pipeline Setbacks: Zacks Industry Rank Indicates Bright 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 #100, which places it in the top 40% of 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present you a few top-ranked stocks to capitalize on the thriving prospects of the small and medium-sized drugmakers’ space, let’s take a look at the industry’s recent stock-market performance and the valuation picture.
Industry Lags S&P 500, Outperforms Sector
The Zacks Medical-Drugs industry is a huge 199-stock group within the broader Medical sector. The industry has underperformed the S&P 500 but outperformed the Zacks Medical sector year to date.
Stocks in this industry have collectively declined 4.9% so far this year, while the Zacks S&P 500 composite has risen 17.2%. The Zacks Medical sector has declined 5.3% in the said time frame.
YTD Price Performance
Industry's Current Valuation
On the basis of the trailing 12 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 1.92, compared with the S&P 500’s 3.80 and the Zacks Medical sector's 2.70.
Over the last five years, the industry has traded as high as 4.94X, as low as 1.80X, and at the median of 2.64X, as the chart below shows.
Trailing 12-Month Price-to-Sales (P/S) Ratio
5 Drug Stocks to Keep an Eye On
Corcept Therapeutics: Menlo Park, CA-based Corcept’s lead drug, Korlym, approved for treating Cushing’s syndrome, has been a consistent revenue driver since its approval. The drug has significant growth potential and Corcept believes there are many eligible patients who are yet to receive it. Pipeline progress has been encouraging.
Corcept’s lead candidate, relacorilant, is currently being evaluated as a treatment for patients with all etiologies of Cushing’s syndrome in a phase III study called GRACE. A new drug application for relacorilant is likely to be submitted in the second quarter of 2024. Corcept is evaluating miricorilant for the treatment of NASH, a market which has great potential. Several pipeline readouts are expected in the next 12 months, including data from GRACE, GRADIENT and CATALYST studies on relacorilant.
The stock of Corcept has risen 134.7% so far this year. Earnings estimates for 2023 have increased from 62 cents per share to 78 cents per share over the past 60 days. The company has a Zacks Rank #2 (Buy).
Price and Consensus: CORT
Alpine Immune Sciences: Seattle, WA-based Alpine Immune Sciences has a diverse pipeline of clinical and preclinical candidates. Its lead pipeline candidate is povetacicept, a potentially best-in-class dual BAFF/APRIL inhibitor, which is being developed for multiple autoimmune diseases, such as systemic lupus erythematosus, autoimmune glomerulonephritis and autoimmune cytopenias. Patient enrollment is ongoing in the RUBY-4 study of povetacicept in autoimmune cytopenias and the RUBY-3 study of povetacicept in autoimmune glomerulonephritis. Initial data from the RUBY-3 study is expected later this year and could be an important catalyst for the stock.
The stock of Alpine Immune Sciences has risen 94% so far this year. The consensus estimate for 2023 loss has narrowed from $1.43 per share to $1.18 per share over the past 60 days. The company has a Zacks Rank #2.
Price and Consensus: ALPN
Aurinia Pharmaceuticals: Canada-based Aurinia Pharmaceuticals makes medicines to treat autoimmune, kidney and rare diseases. It presently markets Lupkynis (voclosporin), an oral therapy for treating active lupus nephritis (LN). Lupkynis was launched in January 2021 and has seen strong demand trends ever since. Lupkynis was approved in the EU in September 2022. Aurinia continues to study Lupkynis for use in expanded patient populations.
Aurinia Pharmaceuticals has a Zacks Rank #2. The consensus estimate for 2023 loss has narrowed from 71 cents per share to 58 cents per share over the past 60 days. The company has a Zacks Rank #2. The stock has risen 55.7% so far this year
Price and Consensus: AUPH
KalVista Pharmaceuticals: Cambridge, MA-based KalVista Pharmaceuticals is developing sebetralstat as an oral on-demand therapy for hereditary angioedema attacks. Enrollment is complete (114 patients) in the pivotal phase III KONFIDENT study. Data from the KONFIDENT study are expected to be reported in the fourth quarter of 2023, which, if positive, would lead KalVista to file a new drug application in the first half of 2024. KalVista Pharmaceuticals recently completed a $58 million financing that will fund the company into 2025.
The stock of KalVista Pharmaceuticals has declined 38.9% so far this year. The consensus estimate for 2023 loss has narrowed from $3.03 per share to $2.83 per share over the past 60 days. The company has a Zacks Rank #2.
Price and Consensus: KALV
Cardiol Therapeutics:This Canadian company is making rapid progress with the development of CardiolRx, its lead drug candidate for the treatment of inflammation and fibrosis in heart disease. CardiolRx is being evaluated in phase II studies in two diseases affecting the heart, recurrent pericarditis and acute myocarditis. Data presented at the American Heart Association demonstrated CardiolRx’s ability to confer cardioprotective effects in a model of recurrent pericarditis.
The stock of Cardiol Therapeutics has declined 59.2% so far this year. The consensus estimate for 2023 loss has narrowed from 41 cents per share to 36 cents per share over the past 60 days. The company has a Zacks Rank #2.
Price and Consensus: CRDL