This Low-Priced Biotech Has Limited Downside Risk and Big Upside Potential
Amid mellow market action following a weak PPI report, here is an update on one of my favorite names in this biotech space, and why it may require a little patience.
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A weaker-than-expected PPI report is giving the market a boost on Tuesday. Core PPI was 0.0% versus expectations of 0.2%, and that is helping to drive down interest rates and increase the likelihood of Fed interest-rate cuts. It is also an indication that the economy is slowing, but the market spin Tuesday is that weaker inflation data is still good news.
Breadth is quite strong at more than three-to-one positive. The Magnificent Seven continues to bounce back, with the Nasdaq 100 QQQ gaining 1.3%. The Russell 2000 IWM small-cap index is lagging again.
While the action is positive it's not very energetic. Technical traders are watching overhead resistance as this bounce continues, and there are a few signs that FOMO is taking hold. Worries about negative seasonality will likely help to keep bullishness in check.
I’m doing very little right now as there isn’t much strong momentum. Stocks are drifting around and making small moves. While some charts look OK for entry, there isn’t any reason to believe that they will deliver trending action.
I wanted to give an update on one small biotechnology that I’ve been following for a very long time. Xeris Biopharma XERS has three products that are selling well, and its drug delivery technology is being reviewed by Amgen AMGN and other major biotech companies.
The stock has been extremely frustrating. It is a very good value, but investors want to see a licensing deal before they become more aggressive.
On Monday, Oppenheimer reiterated its "buy" recommendation and $5 target on the stock. Xeris reported another quarter of consistent execution with product sales of $47 million, which is an increase of 26% over last year. The company should have close to $200 million in product revenue in 2024 and has a market cap of just $350 million.
The Oppenheimer $5 target is based on the sales of the three existing products and doesn’t even consider a potential licensing deal with Amgen or others. Xeris is also working on developing a new drug program, XP-8121, for hypothyroidism. This is a potential $1 billion-plus opportunity, but it is not in the model and not a part of the $5 price target.
The dilemma that XERS presents is that it is obviously quite cheap and appears to be a good value, but there is no way to know when a licensing deal will hit. The potential for positive surprise news is very high, but it may not happen for months. Many small investors don’t want to keep cash tied up while they wait for news.
I have a core position in XERS and will continue to trade around it as opportunities arise. It has limited downside risk and substantial upside potential, but it will require some patience.
At the time of publication, Rev Shark was long XERS.
