There are several reasons that investors should be cautious about buying or holding biotech stocks at this point. First, the Street is generally bearish on the sector lately. In July, Barron provided evidence of that trend when it reported that the shares of a number of biotech stocks had fallen in the preceding week immediately after their drugs were approved by the Food and Drug Administration (FDA).
Also noteworthy is that, as of July 10, the S&P 500 Pharmaceuticals Index had dropped 5% in 2023, while the S&P 500 had advanced roughly 15% during the same period. Given the Street’s bearishness towards the space, it’s quite important for investors to identify which biotech stocks to avoid. That’s because, in the current environment, any major stumble by a biotech company could cause its shares to plunge very sharply.
One factor behind the Street’s pessimism towards the sector is likely higher interest rates, making biotech companies’ current dividends and the profits that they will generate in the future less valuable now. Another factor is the various efforts that Washington is undertaking to make drugs less costly, including forcing biotech firms to accept de facto price caps imposed by Medicare for a number of the most expensive drugs on the market.
That said, here are three biotech stocks to avoid so they don’t damage your portfolio.
On June 23, the FDA determined that Sarepta’s (NASDAQ:SRPT) latest treatment for a rare disease that affects boys, Duchenne muscular dystrophy (DMD), should only be available to “boys four and five years old with DMD and a confirmed mutation in the DMD gene.” Moreover, the agency is forcing the company to conduct another trial of its treatment, and unfavorable results could cause the FDA to take the drug off the market.
My view is that the agency’s narrow approval of Sarepta’s gene therapy suggests it’s not too thrilled with the treatment and could easily decide to pull the plug on it altogether after the results of the upcoming trial are disclosed.
Moreover, Citi, which is bullish on the name, has a price target of $161 on SRPT stock. That’s about 50% above its current level. But if the FDA decides to take the company’s gene therapy off the market, I think the shares could easily sink much more than 50%. Consequently, I view the name’s risk/reward ratio as rather unappealing.
AbbVie (NYSE:ABBV) has lost the exclusivity on its best-selling biologic treatment, Humira, which was also one of the most valuable drugs of all time. Consequently, many companies are developing generic versions, or biosimilars, of the treatment, causing AbbVie’s revenue from the treatment to plunge. For example, in the first quarter, its U.S. revenue from Humira tumbled 26% year-over-year and 41% versus the previous quarter. As more firms develop biosimilars of Humira, AbbVie’s revenue from it will plunge further.
In addition, AbbVie’s other treatments are not exactly delivering great results, as the combined sales of two of its other leading treatments — Skyrizi and Rinvoq — fell $300 million to $2.05 billion in Q1 2023 versus Q4 2022. Further, the company had to postpone developing ABBV-154’s — an anti-TNF steroid conjugate.”
And if all that wasn’t enough, AbbVie is one of the companies being targeted by Medicare for cost savings, as the agency is forcing the company to pay a rebate on Humira.
AbbVie’s trailing price-earnings ratio of 31.76 is far too high, given the huge amount of revenue and profits it’s still poised to lose as a result of Humira’s loss of exclusivity.
After BioXcel (NASDAQ:BTAI) reported the protocols for the Phase 3 trials of its treatment for agitation associated with Alzheimer’s had not been followed correctly, the company is facing an uphill battle. At the very least, its failure to select a competent supervisor of the trial and oversee the trial effectively does not portend well for the future of its Alzheimer’s treatment. Further, the government could force the company to redo the Phase 3 trial, setting back any potential approval of its drug for at least a year.
As for the specifics of the violations, the FDA found that the investigator failed to follow the approved “informed consent form” for a number of trial subjects. Fierce Pharma said standard protocols weren’t always followed, “and sufficient case histories weren’t maintained for some patients.” Finally, an investigator allegedly fabricated an email to make it seem like they reported an adverse event in one of the trial participants sooner than they actually had.
I agree with the points about BTAI by Seeking Alpha columnist Stephen Ayers, who wrote, “doubts persist about [its] commitment to regulatory compliance and ethical conduct, potentially impacting its industry reputation.” Given these doubts, I think betting on BTAI is not a good move at all at this point.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.