Plenty of stocks cratered over the past weeks as COVID-19 overtook headlines and our way of life. However, amid the chaos, buying opportunities emerge for those bold enough to act. Here we explore three drug stocks that could provide a handsome payoff.
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Amneal Pharmaceuticals
Despite being one of the biggest U.S. generic drug producers, Amneal Pharmaceuticals (AMRX 0.81%) is far from a household name. It manufactures and sells a portfolio of 225 generic drugs. In addition to traditional generic drugs, the company's specialty division focuses on complex generics with high barriers to entry that should produce a greater return on investment. The stock rose as much as 52% in December following the approval of EluRyng, the first generic for the NuvaRing birth control product.
On March 20, Amneal hopped into the coronavirus fray when it announced it would accelerate the production and distribution of hydrochloroquine sulfate, one of the drugs identified as a possible treatment for COVID-19. It expects to make roughly 20 million tablets by mid-April.
The company finds itself in a repositioning phase. Its former co-CEOs retook the helm last August. Continuing its effort to refocus on the U.S. market, Amneal sold its business units in the United Kingdom and Germany last year. This past December, Amneal acquired 65% of AvKARE, one of the largest providers of generic drugs to U.S. federal agencies like the Department of Defense and the Department of Veterans Affairs. Additionally, Amneal forged a strategic partnership with Fosun International to sell its products in the growing Chinese pharmaceutical market.
Amneal's stock has been beaten down. It fell than 80% before the approval of EluRyng. It found itself in the crosshairs of a federal probe into opioid manufacturers and could still be on the hook for a sizable settlement. This remains the greatest risk for the time being.
The company announced 2020 guidance for adjusted earnings per share ranging from $0.40 to $0.60 based on $1.875 billion to $1.975 billion in sales. The current outbreak may dampen those expectations. However, some loss will likely be offset by sales of the 20 million hydrochloroquine tablets it seeks to deliver to fight COVID-19. If the strategic turnaround continues to deliver, Amneal's $1.2 billion valuation today could look like a steal in a year or two.
Viking Therapeutics
Viking Therapeutics (VKTX -2.46%) aims to develop first-in-class or best-in-class treatments for metabolic and endocrine disorders. While it boasts three drugs in phase 2 clinical stage trials, much of the attention falls on VK-2809, its drug for nonalcoholic steatohepatitis (NASH).
A multitude of companies have embarked on developing NASH treatments due to the huge potential market size. In some cases, it's believed between 3% and 12% of the U.S. population has it. While not the most advanced drug in development, VK-2809 has demonstrated in prior clinical trials that it can lower LDL-C, decrease liver fat, and reduce plaque-causing proteins in the arteries.
The key trial for VK-2809 continues to enroll patients, with results expected next year. I would expect to see a delay in the time to complete enrollment due to COVID-19. On the earnings conference call on Feb. 28, CEO Brian Lian noted that enrollment was in the "early innings" and trial sites were still coming online, including 12 to 15 outside of the U.S. to be activated in the second quarter.
Luckily for Viking, the company has a strong balance sheet with plenty of cash, $275 million to be exact. Last year the company posted a net of $25.8 million. Even doubling the annual net loss, Viking has enough money to fund several years of operations. This is critical in the current market and because the key trial will likely take longer to get results. Today it trades at a $294 million valuation or slightly more than cash value. If the trial is positive next year, then this stock is an absolute buy.
Verastem
Targeted cancer therapy company Verastem (VSTM -0.27%) has lots going for it. On the back of gaining worldwide rights to a promising cancer drug, Verastem raised $100 million from prominent healthcare investors. It refocused its R&D efforts, cutting back some of the trials for its approved cancer drug Copiktra. Lastly, it reduced sales and marketing efforts, including personnel, to focus on promotional activities at high-volume clinics.
In January, Verastem licensed exclusive worldwide rights for a promising anticancer drug, VS-6766, from Japanese pharma Chugai. Verastem began human testing of VS-6766 in combination with defactinib, another one of its anticancer drugs, to treat patients with mutated forms of the KRAS protein. Cancers with KRAS mutations have proven to be some of the most challenging to treat and include lung, colorectal, and ovarian cancers.
Targeting KRAS has been a hot area for R&D investment. The stocks of Amgen (AMGN 0.33%) and Mirati Therapeutics (MRTX) jumped in June last year following Amgen's release of initial efficacy from its drug targeting mutant KRAS.
Verastem raised $100 million on March 3 from a roster of well-regarded healthcare funds including RA Capital Management, Vivo Capital, Venrock Healthcare Capital Partners, Farallon Capital Management, Acuta Capital, EcoR1 Capital, Avidity Partners and Logos Capital. The investors paid a 12.7% premium to where the stock was trading for their shares.
Biotechs with greater cash positions will be better positioned to weather the current global crisis. The financing coupled with the company's downsizing of its sales and marketing efforts to focus on high-prescribing cancer clinics should give it more breathing room. Verastem will also pare back additional clinical trials with Copiktra. Management guided that the cash reserves will be enough to fund operations into the fourth quarter of 2021.
Biotech stocks provide investors with high-risk, high-reward scenarios. Viking and Verastem have the potential to skyrocket upon successful clinical trials. Meanwhile, revenue-producing Amneal could be viewed as a more conservative option.
