By Michael Brush, MarketWatch
Bargains abound in biotech.
But so do gnarly Covid-19 pitfalls that could sink your investments.
I’ll get to five biotechnology companies that dodge these issues in a second — two favorites from my stock newsletter, Brush Up on Stocks , and three from the biotech team at Jefferies.
But first, here are the three main Covid-19 landmines for biotech investors to watch out for, and how to diffuse them.
Landmine No. 1: Smaller biotech companies short on cash will face a funding crunch if the stock market stays down. They’ll be forced to dilute the heck out of shareholders by raising capital.
How to diffuse it: Favor biotech companies that just raised cash, or have enough on hand to cover at least 18 months of cash burn, says Jefferies biotech analyst Michael Yee.
Several companies were lucky enough to raise capital right before the biotech group started to fall apart on March 6. Among small biotech companies, Karyopharm Therapeutics /zigman2/quotes/210512150/composite KPTI -2.24% was that last one to extract money from the stock market before the fall, on March 3, according to a Jefferies screen. Twist Bioscience /zigman2/quotes/207089457/composite TWST -5.10% and BioXcel Therapeutics /zigman2/quotes/203146111/composite BTAI -1.82% pulled off a similar feat by raising money in the last 10 days of February.
Any of the dozens of companies raising capital in January and February should be able to wait out the storm. Otherwise, favor companies that have a lot of cash relative to their cash burn. Two small biotech companies with very high cash levels relative to cash burn rates are Viking Therapeutics /zigman2/quotes/204618964/composite VKTX -0.85% and Pieris Pharmaceuticals /zigman2/quotes/206469496/composite PIRS +1.55% , according to a screen from Jefferies.
Landmine No. 2: Drug trials could be disrupted by “shelter in place” limits on travel, or a ban on elective procedures in hospitals.
How to diffuse it: Favor companies that are able to do assessments of patients via video conference or phone. Next, companies with cancer therapies should be safe here. Their patients will probably do all they can to avoid missing potentially lifesaving treatments.
Be more careful with companies running trials that require biopsies. They could see disruptions since biopsies may fall into the bucket of “elective procedures” that hospitals postpone to free up resources for Covid-19 victims. A Phase II study of liver ailment therapies by Akero Therapeutics /zigman2/quotes/212786461/composite AKRO -0.94% may face hurdles. Finally, very small companies with only one trial in progress could also be more vulnerable if “shelter in place” drags out.
Fortunately, the Food and Drug Administration (FDA) has signaled it will be OK with reasonable changes to drug trial protocols, as long as they are documented. It’s also open to virtual meetings with companies to review data and discuss issues. “The FDA appears to be flexible and understanding,” says Yee.
Landmine No. 3: Drug companies’ sales forces are getting grounded.
How to diffuse it: This is one of those problems that I like to call a “one-off,” or fixable, issue. The cure for this kind of issue in investing is simple: Patience.
Otherwise, be a little more cautious with companies that were generating excitement because they were launching a new product. Covid-19 slowed the launch momentum of FibroGen’s /zigman2/quotes/207775889/composite FGEN -1.88% anemia drug called roxadustat in China, for example. This could be an issue if it drags out.