By: Joel Sendek
October 1st, 2018
As an analyst earlier in my career, one of the first stocks I ever placed a Buy rating on had the following characteristics: All the other analysts gave it a Hold rating, and it was one of the only players attempting to launch a novel product in a genericized market that most big pharmaceutical companies already abandoned. Does that sound familiar?
The antibiotics subsector within biotech has faced recent headwinds. Negative events at specific companies have driven some of this trend, including clinical setbacks, regulatory delays, challenging launches, and company downsizing among public companies in the sector. As a result, the stock price performance and corresponding market capitalization of the overall subsector have suffered. Furthermore, there have been multiple announcements of large companies exiting the space or divesting their anti-infective development programs (Novartis, Allergan, Sanofi, The Medicines Company and AstraZeneca). Given this backdrop, why would any reasonable investor continue to deploy capital in the space? There are many factors for investors to consider, as outlined below.
1. Fundamental unmet need exists due to continued growth in resistance to current therapies and limited pipeline innovation. While some investors may argue that antibiotic drug launches are too slow, one thing is clear: the next-generation drugs are expected to find demand as resistance reduces the potency of current therapies. We detailed in a prior post how antibiotics that treat unmet need outside the hospital are especially valuable.
2. The valuations are quite compelling on a comparative basis. Many of these companies have late-stage products or even approved compounds with long patent life. Given the low market caps, it does not necessarily require heroic sales and/or earnings to catalyze a turnaround of a stock with a low EV.
3. Incentives exist in the subsector that don’t exist elsewhere in biotech.
· Public capital in the form of government grants has accelerated (BARDA, DoD, NIAID). These programs make available significant non-dilutive capital that is largely absent in other disease areas.
· The regulatory environment for agents that address fundamental unmet need continues to be constructive and may support capital-efficient paths to approval.
4. Investors are ignoring the space, which is perhaps the most important reason for investors to consider investing in antibiotics now. As any value investor will attest, identifying what may be a mispriced stock within an unpopular sector may be a great way to add alpha to your portfolio.
In many ways, the state of the antibiotic companies in the stock market reminds me of that Buy rating I mentioned above. The stock was Genentech. It was 1997, and no big pharma company (or many investors) thought there was any money to be made in drug therapies for cancer because all the chemotherapies were generic. I went out on a limb and printed an above-consensus $600M estimate for my peak sales for the drug Genentech planned to launch themselves as their first ever oncology product: Rituxan.
About the Author:
Chief Financial Officer of Spero Therapeutics