The drug/biotech sector has been witnessing developments in pipeline areas like rare diseases, gene therapy and editing, and mRNA vaccines. It is expected that innovation will continue to drive growth in the sector in 2022 with advances expected to be made in areas like Alzheimer’s, cell and gene therapy and mRNA research
.
Overall, successful innovation resulting in new drug/product approvals, important advances in clinical studies, and strategic collaborations with strong partners have kept small drug companies like
Chinook Therapeutics
KDNY
,
Assertio Holdings
ASRT
,
Viracta Therapeutics
VIRX
and
Soleno Therapeutics
SLNO
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. These companies need ample free cash flow to fund their R&D 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 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. In 2022 so far, though there have been plenty of collaboration and licensing deals, $1 billion-plus acquisition deals have been scanty.
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 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 new priorities for drug companies.
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 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 #91, which places it in the top 37% 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.
Before we present you a few top-ranked stocks to capitalize on the thriving prospects of the small drugmakers’ space, let’s take a look at the industry’s recent stock-market performance and the valuation picture.
Industry Lags S&P 500 and Sector
The Zacks Medical-Drugs industry is a huge 225-stock group within the broader Medical sector. The industry has underperformed the S&P 500 and the Zacks Medical sector in the past year.
Stocks in this industry have collectively declined 29.3% in the past year, while the Zacks S&P 500 composite has declined 12.7%. The Zacks Medical sector has declined 18.1% in the said time frame.
One Year Price Performance
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 2.00 compared with the S&P 500’s 3.52 and the Zacks Medical sector’s 2.32.
Over the last five years, the industry has traded as high as 4.44X, as low as 1.78X, and at the median of 2.50X, as the chart below shows.
Trailing 12 Month Price-to-Sales (P/S) Ratio
4 Small Drug Stocks to Keep an Eye On
Assertio Holdings
: This Lake Forest, IL-based specialty pharma company, which markets neurology, inflammation and pain medications, has a Zacks Rank #1 (Strong Buy).
You can see
the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here
.
Earnings estimates for 2022 have improved from 35 cents per share to 40 cents per share over the past 60 days. The stock has risen 50% this year so far.
Assertio Holdings has undergone a major transformation. Its restructuring is now complete and the company has now shifted focus on growing its business. Assertio Holdings has invested in digital capabilities, resolved several legacy legal uncertainties and set up a new commercial model. The company’s successful execution of its restructuring plan has resulted in significant cost savings, which have boosted its profits despite product sales decline. The company raised its full-year adjusted EBITDA guidance in May, following strong first-quarter results and an optimistic outlook for the rest of the year.
Price and Consensus: ASRT
Chinook Therapeutics
: This Berkeley, CA-based biotech makes precision medicines for kidney diseases. Loss estimates for this Zacks Rank #2 (Buy) stock have narrowed from $3.12 per share to $2.49 per share over the past 60 days. The stock is up 12.3% this year so far.
Chinook Therapeutics’ lead clinical programs are atrasentan and BION-1301, which are being developed for IgA nephropathy (IgAN), a serious progressive disease. Data presented from the ongoing phase I/II study of BION-1301 in patients with IgAN have demonstrated durable reductions in mechanistic biomarkers and corresponding proteinuria reduction within three months of initiating treatment. Moreover, Chinook Therapeutics believes that atrasentan, which is in phase III development for IgAN, has the potential to provide benefit in multiple chronic kidney diseases by reducing proteinuria and having direct anti-inflammatory and anti-fibrotic effects to preserve kidney function. Both the candidates have been granted orphan drug designation by the European Commission for IgAN.
Price and Consensus: KDNY
Viracta Therapeutics
: CA-based Viracta Therapeutics is a precision oncology company targeting virus-associated malignancies. Its lead pipeline candidate is Nana-val, an all-oral combination of the proprietary investigational drug, nanatinostat, and the antiviral agent valganciclovir. Nana-val is being evaluated in multiple clinical studies in cancers/solid tumors including a pivotal study for the treatment of Epstein-Barr virus-positive (EBV+) lymphoma. Clinical data from some cohorts of the pivotal study as well as some other studies are expected later this year and could act as potential catalysts for the stock.
The stock of Viracta Therapeutics has risen 3.6% this year so far. The consensus loss estimates for 2022 has narrowed from $1.44 per share to $1.24 per share over the past 60 days. The company has a Zacks Rank #2.
Price and Consensus: VIRX
Soleno Therapeutics
: This Redwood City, CA-based company makes novel therapeutics for rare diseases. The loss estimates for 2022 have narrowed from 30 cents per share to 28 cents per share over the past 60 days. Soleno Therapeutics has a Zacks Rank of 2. The stock has declined 54.8% this year so far.
Soleno Therapeutics’ lead pipeline candidate is diazoxide choline extended-release (DCCR), which is a once-daily oral tablet in phase III development for the treatment of Prader-Willi syndrome (PWS), a genetic multisystem disorder. Soleno is working with the FDA to obtain alignment for a clinical study to generate additional clinical data to support a new drug application (NDA) for DCCR tablets. In clinical studies, DCCR tablets have shown significant potential to improve behavioral and metabolic outcomes for people with PWS who have no current therapeutic options.
Price and Consensus: SLNO
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