In 2019, tiny Axsome Therapeutics (AXSM -1.44%) emerged from micro-cap obscurity to become the best stock in the market, running up an amazing 3,600% in a year. In 2020, another tiny biotech, Novavax (NVAX -11.23%), came out of nowhere to stomp the stock market, with its share price skyrocketing 2,700%. And so far in 2021, yet another small biotech is the top stock in the market, as Cassava Sciences (SAVA -6.46%) has jumped from under $8 a share in January to $80 in August, a startling gain of over 1,000% in eight months.
What's fascinating about the biotech sector in particular is how fast it all happens. The sector is notorious for amazing price swings that can happen overnight, in either direction. So why is that? Why are biotech stocks in particular so volatile? And why do we keep seeing a biotech stock as the #1 stock in the market every year? And what biotech stock might -- repeat, might -- pull off this feat next year? Let's analyze why Axsome, Novavax, and Cassava zoomed higher over the last few years, and why I think Pieris Pharmaceutical (PIRS) has a chance at a similar remarkable performance in 2022.
1) All three of these biotech winners started off as tiny stocks
The main reason these stocks soared so high is that all three started with maximum negativity, and very tiny market caps. By the end of 2018, Axsome Therapeutics had a micro-cap valuation of $85 million. In 2019, Novavax stock fell under $1, and the company had to do a 1-for-20 reverse split in order to keep its shares listed on the Nasdaq. And at the beginning of 2020, Cassava had barely achieved small-cap status, with its market cap hovering at $240 million.
So all three amazing stocks started off unloved by the market. Why does a biotech stock get so cheap? Probably the most common reason is the market believes the company's science is bad. Novavax, for instance, had a notable failure in its quest for a respiratory syncytial virus (RSV) vaccine. This clinical trial failure sent investors to the exits and sent the stock down into a crater. That's why the stock was $4 a share (or twenty cents, pre-split).
Yet the market was spectacularly wrong about Novavax. While the company's RSV drug was a failure, Novavax had another drug in clinical trials, a flu vaccine. And this drug was a world-beater. It was flying through clinical trials, and it had defeated the market-leading flu vaccines from Sanofi (SNY -1.28%) over and over again.
In 2019, Novavax had the label of "bad science," but the data for a different drug said otherwise. Sometimes companies with tiny market caps actually have wonderful drugs that are kicking ass in clinical trials. If you find such a company, you might want to buy some shares.
2) Is there enough money for a phase 3 trial?
It's not enough to have good science, however. Nobody is allowed to market their drugs to the public until the science has been validated in clinical trials and approved by the FDA. And clinical trials cost a huge amount of money. So that's a major question to resolve before you invest -- does the biotech have enough cash for a phase 3 trial? If the answer is "no," the drug is stalled and won't go anywhere.
Many unprofitable biotech companies finesse the money issue by collaborating with Big Pharma. When you see that, you can have faith that there's enough cash for a phase 3 trial. What happens when you collaborate, however, is that Big Pharma often acquires the rights to the molecule. In other words, you're selling off your future in order to pay the bills today.
Interestingly, neither Axsome nor Novavax nor Cassava have an active collaboration with Big Pharma. All three of these companies have elected to own 100% of the rights to their lead molecules. And all three have enough cash for phase 3 trials. This independent approach is riskier, but also potentially a lot more rewarding.
Biotech investors often like to see collaboration with Big Pharma -- it's a validation of the science, and it removes a lot of financial worries for small companies. But if you're chasing big rewards, you might want to look at biotech companies that are still independent (and have enough cash to stay that way).
3) Can Pieris pull off a miracle run in 2022?
Pieris stock is very cheap right now, with a $291 million valuation. (You know a stock is cheap when it could have a 10-bagger and still qualify as a small-cap!) Is the stock so cheap because its science is bad?
It would probably be more accurate to say that Pieris' science is unproven. Like many unprofitable biotechs, Pieris doesn't have a drug in phase 3 trials yet. In fact we're still waiting on positive phase 2 data. So it's early, and that's a danger sign. The reason Axsome, Novavax, and Cassava all skyrocketed is that all three companies made the journey from unproven drug to pivotal trials very quickly. Pieris is a few years away.
Another major difference is that Pieris has signed multiple collaborative deals, with Roche (RHHBY 0.69%), Astra Zeneca (AZN -0.09%), and Seagen (SGEN), among others. In one sense that's good news, in that money for clinical trials isn't an issue for the company. Any drugs that work will make it to phase 3 trials and beyond. And all this collaboration is a validation of the science, and adds confidence that the company is on the right track.
Is Pieris sacrificing its future to pay for its present? In my opinion, no. While Astra Zeneca now has rights to the company's asthma drug (its lead molecule), what makes Pieris such an exciting stock is not one particular drug, but the company's entire platform. Pieris owns the rights to all the Anticalin proteins, and its library contains more than 100 billion of these new molecules.
I love the risk/reward for Pieris. If the company's drugs actually work -- we'll have data in that regard next year -- Pieris stock will shoot much higher. Under its existing collaboration agreements, Pieris might make up to $9 billion if its Anticalin drugs reach certain milestones. But what will really make the stock take off is if/when other pharmaceutical players start making deals to add some of the company's Anticalin molecules to their pipelines.
How do you value an entire new class of pharmaceuticals? Well, in 2019 the world sales numbers for monoclonal antibodies (mAbs) was $163 billion. If Pieris' partners report any positive data on these Anticalin drugs next year, the upside for this stock is enormous.
