Jefferies Biotech Growth Picks Have Big Upside Potential

Health and Healthcare

Published: September 24, 2018 10:25 am

Last Updated: January 11, 2020 5:27 pm

Increasingly, the companies on Wall Street that we cover are starting to agree that while the future’s still bright for the U.S. economy, the future may be one of stock market gains that are much lower than over the past 10 years. When that is the case, then investing strategies often shift from indexing to a more disciplined stock-picking routine, and that’s when investors need solid growth ideas.

Jefferies highlights the firm’s top growth stocks to buy each week, and recently four top biotech stocks made the cut. While these companies are better suited for accounts that have a higher risk tolerance, they all make good sense now, and all have outstanding upside potential.

Cara Therapeutics

This company has big clinical data coming in 2019. Cara Therapeutics Inc. (NASDAQ: CARA) is focused on developing and commercializing chemical entities designed to alleviate pain and pruritus by focusing on kappa opioid receptors. It is developing a class of product candidates that targets the body’s peripheral nervous system.

The company’s product candidate pipeline includes IV CR845 for acute pain, IV CR845 for uremic pruritus, oral CR845 for acute and chronic pain, and CR701 for neuropathic and inflammatory pain.

Jefferies is positive on the top product and the revenue potential:

CARA’s lead program IV Korsuva is for the treatment of chronic kidney disease on hemodialysis associated pruritus (CKD-HD-aP). There are ~180,000 patients which suffer from CKD-HD-aP and the FDA has not yet approved any drug for treatment. We currently model peak penetration of 27% and $573 million in peak-adjusted US sales. We expect the two ongoing Phase 3 trials to generate similar positive data based on the robust prior data (70% likelihood for positive data). Top-line Phase 3 data is due to read out in mid-2019 and should be a positive catalyst for shares.

The Jefferies price target for the shares is $30, and the Wall Street consensus target is $26.89. The stock traded early Monday at $22.95.

Gilead Sciences

This stock is trading a very reasonable 10.6 times estimated 2018 earnings. Gilead Sciences Inc. (NASDAQ: GILD) is a biopharmaceutical company that discovers, develops and commercializes therapies for the treatment of HIV/AIDS, liver disease, cancer and inflammation. The recent acquisition of KITE allows for entry into the CAR-T space, indicating a renewed focus in oncology.

The company’s products include Stribild, Complera/Eviplera, Atripla, Truvada, Viread, Emtriva, Tybost and Vitekta for the treatment of human immunodeficiency virus (HIV) infection in adults; and Harvoni, Sovaldi, Viread and Hepsera products for the treatment of liver disease.

The company posted solid clinical results recently, and Jefferies weighed in:

Gilead reported the first Phase 3 study for filgotinib in Rheumatoid Arthritis (RA), showing overall positive efficacy and safety, in line with high expectations. We see this as a modest but good catalyst for the company given recent stock under performance and would expect this to improve investor sentiment. We note that the next major Phase 3 RA studies read out during first half of 2019 and we would expect them to act as further catalysts for shares.

Jefferies has a $95 price objective, and the consensus target price is $88. They traded at $75.95 Monday morning.

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Iovance Biotherapeutics

Shares of this off-the-radar clinical-stage biopharmaceutical company have some big upside potential. Iovance Biotherapeutics Inc. (NASDAQ: IOVA) is focused on the development and commercialization of cancer immunotherapy products designed to harness the power of a patient’s own immune system to eradicate cancer cells. Its lead program is an adoptive cell therapy utilizing tumor-infiltrating lymphocytes, which are T cells derived from patients’ tumors, for the treatment of metastatic melanoma.

The company is developing LN-145 to treat cervical and head and neck cancers. It is collaborating with the National Cancer Institute to evaluate unmodified tumor infiltrating lymphocyte (TIL) in other solid tumor indications, such as ocular melanoma, bladder, breast and lung cancer. It is collaborating with the National Cancer Institute to evaluate TIL in combination with the checkpoint inhibitor, Keytruda.

The Jefferies report noted this:

We hosted a call with an oncologist from the Moffitt Cancer Center to review the initial data from the company’s first NSCLC TIL study. Note that the stock sold off when the data was presented. Our expert highlighted the significant unmet need in non small cell lung cancer patients who failed to respond to anti-PD-1 therapy and felt that the results were favorable. The expert commented that the objective is to develop a follow-on IO therapy that could provide a durable response in PD-1 refractory patients vs. the alternative of progressing to chemotherapy.

The $31 Jefferies price target compares with the $29.43 consensus target. The shares were last seen trading at $13.60.

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Melinta Therapeutics

This small-cap play could be a hot pick for super-aggressive accounts. Melinta Therapeutics Inc. (NASDAQ: MLNT) develops and commercializes novel antibiotics designed to provide therapeutic solutions. Its lead product is Baxdela, an antibiotic approved by the United States food and drug administration (FDA) for use in the treatment of acute bacterial skin and skin structure infections.

The company also has an extensive pipeline of preclinical and clinical stage products This pipeline includes many important classes of antibiotics, each targeted at a different segment of the anti-infective market.

Jefferies just recently started coverage with a Buy rating and noted this at the time:

The Company operates as a pure play antibiotics business, with 4 marketed products and an expanded sales force. The benefit from the salesforce expansion should be seen in the third quarter, but we see further catalysts as a Phase 3 readout for Baxdela is due by the end of 2018 as well as potential EU approvals for Baxdela and Vabomere by the end of the year or in 2019. We see peak sales estimates of ~$240 million and ~$270 million for Baxdela and Vabomere respectively.

Jefferies has a huge $15 price target. That compares with a $13.20 consensus target and the recent share price of $4.50.

These four companies range from a large-cap established player to a small-cap stock trading at less than $5. It is important to remember that biotech investing can be extremely volatile and is not suitable for accounts that don’t have a very high risk tolerance.