Two Small-Cap Biotech Stocks With Dips to Buy
Some of the post-election enthusiasm around equities has started to ebb in the last few trading sessions. Small-cap names have been particularly hard hit, with the Russell 2000 falling approximately 4% since the opening bell on Tuesday. This is not surprising, given the yield on the 10-year treasury has crept back up all the way to 4.45% after October CPI and PPI readings showed the "last mile" on the inflation front could be challenging.
The 10-year treasury yield has now moved up more than 80 BPS since the Federal Reserve started to lower the fed funds by 75 BPS, starting with a 50 BPS cut at the FOMC meeting in mid-September. Hardly encouraging, given the central bank thought that the surge of inflation was "temporary" and "transitionary" throughout 2021 before being forced to implement the most aggressive monetary policy since Paul Volcker starting in March 2022.
I did a bit of bottom fishing on Thursday as I continue to incrementally move some additional funds into the market using covered call orders. I targeted a couple of biotech stocks trading around $5 a share that have been extraordinarily weak but appear to have some value now.
Let’s start with Kyverna Therapeutics (KYTX), whose stock is the poster child for busted IPOs as the shares have headed straight down since the company went public at just over $20 a share early this year. The main driver of that decline was when a patient relapsed in a lupus nephritis trial that the company was conducting. It should be noted that the relapsed participant received a lower dose level than other participants in the study and seems to be an outlier.
The company is focused on developing next-generation CAR T-cell therapies. Its primary asset is a candidate called KYV-101, which has shown promising pre-clinical data and now is in early clinical stage evaluation to treat three neuroinflammatory and two rheumatology indications. With the decline in the shares, the equity is now selling significantly below the company’s net cash balance and worthy of a dart throw, especially with the additional downside protection provided by a covered-call strategy.
Next up is a biopharma called Ardeylx (ARDX) whose stock has plunged due to a recent litigation setback. The company has one product approved and marketed under two different brand names. This is Tenapanor, which is also known by its brand name Ibsrela and is approved for the treatment of irritable bowel syndrome with constipation (IBS-C) and as Xphozah for control of serum phosphorus levels in adult patients with chronic kidney disease (CKD) on dialysis.
The stock fell hard last week after its lawsuit against the Centers for Medicare and Medicaid Services (CMS) around its proposal to bundle Xphozah in the Medicare payment system was dismissed. Xphozah had recently been approved by the FDA as a late-line add-on therapy to cut serum phosphorus in adults with chronic kidney disease on dialysis. Xphozah generated just over $50 million worth of sales in the third quarter.
The dismissal put Xphozah’s future in doubt as roughly 60% of its projected sales were going to come via the CMS. Management is determining its best course forward on this front and this might not be the end of the saga. In addition, Ibsrela should do around $150 million in revenues in FY2024 after being launched in 2022. Management believes Ibsrela has $1 billion peak annual sales potential before seeing generic competition in 2033. With a market cap of $1.1 billion, the stock seems worthy of a small bet and has significant upside if/when leadership figures out a way to remove the obstacles around Xphozah.
At the time of publication, Jensen was long KYTX and ARDX.