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5 Medical Outperformers That Might Lose Steam in 2021

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The drug and biotech industry has done relatively well this year, following a major crash in March due to the COVID-led panic.

The chart below shows that the Medical-Biomedical and Genetics (Bio-Med), the Medical-Drugs and the Large Cap Pharmaceuticals have risen 9.8%, 9.4% and 3.1%, respectively while the S&P Zacks S&P 500 composite has gone up 17.2%.

 

This bull run was largely driven by coronavirus vaccine hopes. COVID-19 has claimed more than 1.65 million lives so far globally and led to lockdowns across the globe, affecting trade and economies. A coronavirus vaccine is anticipated to contain the further spread of the virus. Therefore, progress of coronavirus vaccine candidates in the past nine months fueled the strong rally following the crash. We note that two vaccines — Pfizer/BioNTech’s BNT162b2 and Moderna’s mRNA-1273 — received emergency use approval earlier this month, keeping hopes for a normal world by next year alive.

Shares of several biotech companies engaged in developing a COVID-19 vaccine increased manifold. Stocks of leading vaccine players, BioNTech and Moderna have increased 207% and 617% so far this year, respectively. Investors of Novavax enjoyed the strongest rally in any coronavirus-related biotech company as the share price increased 30-fold.

Sales of several physician-administered drugs were negatively impacted due to travel restrictions in the early part of the pandemic. However, sales seemed to recover during the third quarter. In the third quarter, almost all companies witnessed improvement in demand trends as global economies began to recover. However, the pace of recovery was slower than expected due to rising cases of infections. Accordingly, most companies maintained a cautious outlook for the fourth quarter with some retaining or tightening 2020 guidance.

Moreover, clinical studies of multiple biotech and drug companies were disrupted due to the coronavirus pandemic, delaying scheduled study data readouts. These also impacted share prices negatively. Small biotechs with a few pipeline candidates were the worst affected due to coronavirus. However, several of these biotechs are likely to have attractive valuations and will be worthy portfolio additions, as their share price will likely appreciate if study readouts are promising despite the delays.

Meanwhile, macro factors including government scrutiny of high drug prices, pricing and competitive pressure will continue to haunt the pharma sector. Moreover, mergers and acquisitions have been tepid during 2020 as the focus was largely on development of coronavirus vaccines or treatments. The biggest deal of the year came earlier this month when AstraZeneca offered to buy biotech major Alexion for approximately $39 billion to add the latter’s rare-disease portfolio. We expect biotechs with rare disease drugs/candidates and gene therapies in their portfolio are likely to be the primary targets for M&A in 2021. With availability of vaccines, M&A activities are likely to rise next year.

Though it would be prudent to add a few stocks from this growing sector to your portfolio, you need to watch out for some stocks, which, despite performing well this year, may lose momentum next year. In this article, we discuss five stocks whose prices shot up this year but these might not prove to be good buys for 2021. These stocks carry a Zacks Rank #4 (Sell) or #5 (Strong Sell) and have seen their earnings estimates for 2021 decline in the past 60 days.

CRISPR Therapeutics AG (CRSP - Free Report)

CRISPR Therapeutics stock is up 173.9% this year so far, outperforming the industry’s increase of 9.8% as the company progresses with its pipeline of gene therapies, especially CTX001. The company is developing CTX001 in collaboration with Vertex Pharmaceuticals in two separate phase I/II studies as a potential one-time treatment for transfusion-dependent beta thalassemia and sickle cell disease. Earlier this month, the company announced that the candidate demonstrated a consistent and sustained response in both patient groups. Three other early-stage gene therapy candidates, CTX110, CTX120 and CTX130, are being developed for different oncology indications.

 

With no new collaboration agreements in view, the company will depend on its pipeline progress for milestone payments next year, which may lead to lower revenues. The company's estimates for 2021 have widened from a loss of $4.97 per share to $5.13 in the past 60 days. The stock currently carries a Zacks Rank #4.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Denali Therapeutics Inc. (DNLI - Free Report)

Denali Therapeutics’ shares are up 419.4% so far this year, also outperforming the industry. The company is developing several pipeline candidates engineered to cross the blood-brain barrier and targeting neurodegenerative diseases. In August, the company entered into a collaboration with Biogen to co-develop and co-commercialize its lead pipeline candidate, DNL151, that is being developed for Parkinson’s disease in a late-stage study. The deals significantly boosted cash position. The collaboration will also generate significant amount in milestone payments. The company has several pipeline candidates in early-stage development.

 

The company’s shares surged primarily due to the Biogen deal. Absence of such deals in 2021 may lead to stagnant share price. The late-stage study on DNL151, initiated in August 2020, will likely drive operating expense higher next year. This might have led to negative estimate revision of 2.8% for 2021 over the past 60 days. It carries a Zacks Rank #4.

Seres Therapeutics, Inc. (MCRB - Free Report)

Seres Therapeutics is developing its lead pipeline candidate, SER-109, as a potential treatment for recurrent C. difficile infection, a leading cause of hospital-acquired infection and one of the top three most urgent antibiotic-resistant bacterial threats in the United States. The company’s shares surged following positive data readout from the phase III study — ECOSPOR III — evaluating SER-109. The company’s shares have surged 615.6% so far this year, outperforming the industry. However, the safety data from the ECOSPOR III study is not enough to file a biologics license application. The company is conducting an open-label study to accrue the required safety data. The company has a few other pipeline candidates in early- to mid-stage clinical studies.

However, estimates for this #4 Ranked stock have widened from loss of 25 cents per share to 27 cents per share for 2021 in the past 60 days.

Rocket Pharmaceuticals Inc. (RCKT - Free Report)

Rocket Pharmaceuticals’shares have increased 151% so far this year, outperforming the industry on the back of encouraging progress of its adeno-associated viral vector (AAV)-based gene therapy candidate, RP-A501. The study is evaluating single intravenous infusion of either of two doses of the LAMP2B expressing candidate for the treatment of Danon disease, a rare X-linked inherited disorder caused by genetic mutations in the LAMP2 gene.

 

The company carries a Zacks Rank #4 and has witnessed negative estimate revision of 9.4% for 2021 over the past 60 days.

NantKwest, Inc.

NantKwest is developing an immunotherapy for bladder cancer as well as a COVID-19 vaccine in collaboration with a privately-held immunotherapy company, ImmunityBio. In December, the company announced positive data from the phase II/III bladder cancer study. The companies are progressing well with development of coronavirus vaccine. Meanwhile, NantKwest announced a merger agreement with ImmunityBio, boosting its pipeline. The company’s shares are up 322.7% so far this year.

 

However, the coronavirus vaccine is in early-stage of development, raising competition with availability two authorized vaccines and multiple late-stage vaccine candidates being developed by large pharma companies. Moreover, any pipeline setback may drive share price down going forward.

The company, carrying a Zacks Rank of 5, has seen negative estimate revision of 1.19% for 2021 over the past 60 days.

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