I’m Eyeing 2 Biopharma Stocks Amid Choppy Market Action
These small-cap biotechs offer core businesses that fund a much bigger opportunity.
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We have mixed action on Thursday morning as investors wonder if some stalling after a huge move is a top or just a pause that refreshes. Breadth is running slightly negative, but the good news is that chips and technology names bounced a bit after a poor open. It is the close that counts but we do have some signs of support.
The Nasdaq 100 (QQQ) is lagging primarily due to some poor reactions to technology names like AppLovin (APP), Datadog (DDOG), and Western Digital (WDC). What is bad for suppliers, however, is good for the hyperscalers. The Mag7 (MAGS) is trading up 0.7% and that is helping the mood.
Small Cap Earnings
There is a flood of small cap earnings reports hitting, and I’m busy trading the reactions. Yesterday I was able to start building up my Precigen (PGEN) position following a stellar report.
A couple of other small biotechnology names on my radar are Xeris Biopharma (XERS) and Delcath Systems (DCTH). Both reported this morning, and both had good reports. The companies have a common theme that I think makes these unusually strong picks. Each has a core product that is growing quickly and throwing off substantial cash flow. Each company is using that cash to build a second product that could be a good deal larger than the business the market is paying for today.
The market prices only what it can measure. Right now that is the base business at each company. The larger opportunity is not in the models yet and is carrying little or no value. That gap is where the opportunity exists. This is the edge that I am trying to exploit.
Xeris and the Once-a-Week Thyroid Idea
Xeris is a profitable specialty drug maker. Its growth engine is Recorlev, a treatment for Cushing’s syndrome, which is a disorder of too much cortisol. Recorlev revenue grew 81% in the quarter and pulled total revenue up about 29%, with gross margin near 86%.
The reported number was a net loss, which surprised some folks and is pushing the stock down about 10%. The loss came from a one-time, non-cash charge of about $30 million to retire some convertible debt. It is an accounting entry, not the business. Take it out and Xeris earned money and its cash earnings grew.
The reason I want to own XERS isn’t because of the strong current business. I want to own it for XP-8121. This is a once-a-week injectable version of levothyroxine. Currently there is only a daily thyroid pill that is among the most prescribed drugs in the country. A weekly shot that fixes the problem of patients forgetting a daily pill reaches a market measured in the billions, against a company worth around a billion and a half. Management set Sept. 9 to lay out the Phase 3 plan and the commercial opportunity. The Phase 3 has not started dosing, so the payoff is a 2027 story rather than a 2026 one. The profitable base is what pays me to wait for it.
I am adding shares of Xeris on the weakness today which appears to be due to the misunderstanding of a one-time, non-cash charge related to debt retirement.
Delcath and the Liver-Directed Platform
Delcath treats cancer in the liver. It sells a system that seals off the liver’s blood supply and delivers a high dose of chemotherapy straight to it. Blood is treated in an external device before it returns to the body, so the tumor takes the hit and the rest of the patient is spared most of the toxicity. Today it is approved for one use, metastatic uveal melanoma that has spread to the liver.
The numbers this morning were strong. Revenue grew 20%, the number of procedures rose about 30%, and gross margin reached 90%, up from 86% a year ago. The company raised its full-year revenue and volume guidance. Cash earnings slipped against last year, but that is spending by choice. Research costs jumped as Delcath funds new trials, and it is paying for them out of operating cash flow while carrying no debt.
Uveal melanoma is a small market. The larger opportunity is the same delivery approach aimed at cancers that show up in the liver far more often, breast and colorectal area. Independent doctors reported a 60% liver response rate using this technique in heavily pretreated breast cancer that had spread to the liver, and Delcath just dosed its first patient in a Phase 2 there. If the approach carries across liver-dominant tumors, the market it can reach is a multiple of what it serves now.
What These Two Have in Common
Both companies are running the same play. A profitable, growing product covers the bills and pays for a much larger opportunity that is still a few catalysts away from showing up in analyst estimates. I am not paying up for a story and hoping it arrives. I own a business that works now and has a good value while the bigger idea develops.
Xeris still has to run its trial and show the data. Delcath’s breast cancer signal is early and comes from small, backward-looking work. Neither stock is priced for failure, and neither is priced for a big win. The value of the existing business provides substantial support while waiting for the bigger story to play out.
Game Plan
I am long both and adding on weakness rather than chasing strength. With Xeris I want to build into the Sept. 9 event on the dips that tend to come as a date like that approaches, and I am sizing to that near-term catalyst rather than to a launch that is still years out. With Delcath I am watching the number of active treatment centers and the breast cancer trial as the signs that the bigger business is developing, and I will add as those confirm.
At the time of publication, DePorre was long PGEN, XERS, DCTH.
