If you think tech stocks have it rough right now, sneak a peek at biotech stocks.
The sector is in the midst of its most severe correction ever. Although it's healthy to see excess squeezed out of valuations, that's no consolation to investors who bought in during the peak last year. And the worst of the correction could be ahead.
That may sound scary, but investors aren't helpless. It helps to navigate volatility by focusing on fundamentals.
Here's how a back-to-the-basics approach and a focus on companies' cash runways -- their ability to fund themselves -- might help individual investors find stable biotech stocks for 2023 and beyond.
Cash Is King in Biotech
Many investors were besides themselves earlier this year when biotech companies began trading at valuations less than their cash balances.
That's actually not so meaningful for precommercial drug developers, which will almost always burn through their existing cash balances (and then some) before earning regulatory approval for their first drugs. In fact, drug developers often see wider losses after commercializing their first drug product.
That doesn't mean cash is meaningless. Rather, investors should focus on a company's cash runway instead of the cash balance. It's all relative to the company's valuation, level of maturity, and near-term expectations for cash burn.
A number of companies are well positioned to navigate tightening financial conditions thanks to healthy cash runways. These drug developers have enough cash to fund operations into at least 2025.
- Cerevel Therapeutics (CERE) is an emerging drug developer focused on neuro and psychiatric disorders. The Pfizer (PFE) spinout has turned heads with promising data for its lead drug candidate targeting schizophrenia and has a deep pipeline behind it. Although the lead drug candidate is behind a key competitor, its selectivity could enable it to dominate the competitive landscape. The business held $531 million in cash at the end of June 2022, which was enough to fund operations into 2024. It raised another $554 million in August to snag one of the longest cash runways in the industry.
- Kymera Therapeutics (KYMR) develops drugs in the field of protein degradation, which promises to deliver more selective treatments for a variety of diseases. The approach is prominent but unproven. The lead drug candidate's target, a molecule called IRAK4, was dealt a blow when Pfizer discontinued its own drug candidate for the target. Initial data from the first two clinical programs are expected by year-end. The business held $483 million in cash at the end of June 2022 and raised another $150 million in August.
- Regenxbio (RGNX) is developing a portfolio of engineered viral capsids for safer and more effective gene therapies. The genetic-medicines producer lately has been riding a string of positive developments across programs targeting genetic diseases in eye, muscle, and brain tissues. The business ended June 2022 with $682 million in cash, which can carry investors through multiple data readouts and regulatory decisions for the pipeline.
- Relay Therapeutics (RLAY) is using artificial intelligence to develop more selective therapies. Although tech-enabled drug development has increased, Relay's approach is differentiated by its focus on protein motion. Most peers focus on combing through complex datasets with advanced computational techniques. The precommercial drug developer has a solid path to earning regulatory approval for its first drug candidate in the next few years thanks to an accelerated timeline. An emerging portfolio focused on breast cancer provides additional upside. Relay ended June 2022 with $838 million in cash.
- Verve Therapeutics (VERV) is a pioneer in Crispr base editing. The second-generation gene-editing approach avoids the risky genome cutting required by its predecessor. When used for diseases well-suited for the approach, the overall odds of success should be relatively high. The company's initial approach of treating cardiovascular diseases meets the criteria for a higher probability of success. The business reported a cash balance of $294 million in June 2022 before raising an additional $310 million in combined proceeds from a collaboration with Vertex Pharmaceuticals (VRTX) and follow-on stock offering.
It's important to remember that a healthy cash runway doesn't guarantee success. But it sure helps swipe risk off the table.
Drug development encompasses risks spread across development, regulatory, commercial, and financial activities. A healthy cash runway derisks development, which can help support durably higher market valuations if clinical trials prove successful.
The five biotech stocks above can fund operations into 2025 without raising additional capital. They most certainly will seek to pad their balance sheets before then, but they each have the option to put their heads down and focus on clinical development for the next couple of years.
That should be pretty valuable if the global economy enters a recession in 2023.
