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May 22, 2022, 8:10 a.m. EDT

Biotech is in ‘a Category 5 storm, the same as energy in 2020’ — why contrarians say the sector is a buy

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By Michael Brush

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Yee expects M&A to pick up gradually, but he’s less optimistic than McDonald. “M&A is tough when markets are falling fast,” he says.

2. The FDA gets its act together

From baby formula shortages to drug-approval delays and terribly mixed signals on approval paths, the Food & Drug Administration has been a big source of problems and confusion for everyone from parents to biotech investors. “The FDA has become more unpredictable,” says Chan.

OK, it has had the distraction of the pandemic and the need to focus on vaccines and therapies. But now with COVID-19 winding down (hopefully), perhaps the FDA can refocus on drug approvals.

3. Broader market conditions improve

Investors continue to panic about inflation and recession, because they know the Fed can’t come to the rescue with the proverbial “Fed put” (stimulus to counter stock-market declines).

Since the Fed has taken the training wheels away from investors, they have to think through inflation and GDP growth on their own. So far, they’re doing a poor job since it seems clear inflation has peaked and we aren’t going into recession . Hopefully, they get up to the task soon.

Stocks to consider … or avoid

Chan singles out UCB /zigman2/quotes/206260411/delayed UCBJY -0.70% /zigman2/quotes/207179459/delayed BE:UCB -0.38% , a Belgian biotech company. Its shares got hit hard in mid-May when the FDA dinged its request for approval of its bimekizumab therapy for the treatment of a chronic inflammatory disease called plaque psoriasis because of some manufacturing inspection issues.

Now it has to reapply, but the data supporting bimekizumab seem sound. It has already been approved in Europe, Japan, Canada and Australia.

She also likes the prospects for two other UCB therapies in late-stage testing for neurological disorders: zilucoplan and rozanolixizumab. Expect more data readouts and applications for approval in the second half of this year, possible catalysts.

Yee singles out Vertex Pharmaceuticals /zigman2/quotes/202259802/composite VRTX -1.24% , Fate Therapeutics /zigman2/quotes/209623007/composite FATE -8.18% and Ventyx Biosciences /zigman2/quotes/230431734/composite VTYX -1.22% .

Vertex has been posting strong revenue growth for its cystic fibrosis treatment trikafta (up 48% in the first quarter to $1.76 billion). It’s also showing good progress on pipeline therapies for cystic fibrosis, sickle cell disease, kidney disease, diabetes and pain. Its stock is down 14% from April highs of $292.75.

Fate Therapeutics stock has slumped 77% since August, even though there have been no negative developments, says Yee. Fate continues to show progress developing its natural killer cell immunotherapies for cancer. Fate doesn’t need to raise capital soon. It has a partnership with Johnson & Johnson /zigman2/quotes/201724570/composite JNJ +0.0060% to develop cancer therapies.

Ventyx Biosciences develops therapies for inflammatory diseases like psoriasis, arthritis, Crohn’s disease and colitis. It expects key Phase I trial data on two of them over the next four months.

The companies trading ‘for free’

Yee cautions against thinking companies trading below cash might get bought out simply because their science can technically be purchased for free. “They likely suffered from negative events,” he says. But he does have buy ratings on Olema Pharmaceuticals /zigman2/quotes/222642382/composite OLMA -8.43% , which has around $7 per share in cash vs. a recent stock price of $2.10, and LianBio /zigman2/quotes/230552037/composite LIAN -5.64% ($3.76 in cash vs. $2.47 stock price).

Olema is conducting early-stage studies of therapies for breast cancer. LianBio helps partners study and develop their therapies in China. It has a deal with Bristol-Myers Squibb /zigman2/quotes/202559280/composite BMY +0.58% , for example, to develop a cardiovascular therapy there called mavacamten, approved in the U.S. Yee thinks this China angle alone is worth $13 a share for LianBio. It’s partnering with other companies to develop therapies for inflammation, respiratory and eye disorders.

“We appreciate sentiment may continue to be challenging on China stocks, but the company has plenty of cash to execute on the pipeline and ongoing trials including the lead mavacamten asset,” says Yee.

Note that these are tiny sub-$300 million market cap companies which can be quite risky in biotech.

Vaccine stocks

Moderna /zigman2/quotes/205619834/composite MRNA -5.93% , Pfizer /zigman2/quotes/202877789/composite PFE -1.18% and Novavax /zigman2/quotes/202614340/composite NVAX -8.19% are way off the highs seen in the thick of the pandemic. But Yee cautions against getting too bullish on them. The reason: It seems like the pandemic is receding, and large vaccine buyers around the world have been opting out of purchase options and deferring shipments.

Michael Brush is a columnist for MarketWatch. He owns VRTX and FATE and has suggested VRTX, FATE, PFE, NVAX and OLMA in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.

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