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Are These 2 Beaten-Down Biotech Stocks Worth Buying?

George Budwell, The Motley Fool

Biotech stocks that fall hard and fast can sometimes turn out to be outstanding long-term investing vehicles. The key issue to understand is whether the stock's downward move was actually justified in the first place. Biotech equities, after all, can move sharply lower in the blink of an eye for a variety of reasons -- some of which turn out to be nothing more than a minor speed bump in the grand scheme of things.  

Keeping with this theme, Acadia Pharmaceuticals (NASDAQ: ACAD) and Dynavax Technologies (NASDAQ: DVAX) both took a big step backwards this week. Should bargain hunters take advantage of this recent weakness or is it better to avoid these beaten-down biotech stocks for the time being? Let's break down each company's long-term value proposition to find out. 

A man with curly hair and glasses getting punched in the face.

Image source: Getty Images.

The case for and against Acadia

Yesterday, Acadia announced that the late-stage trial dubbed "Enhanced" designed to evaluate pimavanserin (a.k.a. Nuplazid) as an adjunctive treatment in adult schizophrenia patients missed its primary endpoint. The drugmaker's shares, in turn, immediately dropped by as much as 16.2% in after-hours trading.

The core reason is that this clinical setback may have just wiped hundreds of millions in future sales off the table. Investors also seem to be concerned that Nuplazid's other ongoing trials for dementia-related psychosis and major depressive disorder may miss the mark as well. If so, the drug's commercial opportunity would ultimately be limited to its current FDA-approved indication -- Parkinson's disease psychosis (PDP).

Should investors run for the hills in the wake of this late-stage miss? It's hard to say for a couple of reasons. First and foremost, Nuplazid's PDP indication has proven to be a lucrative market. In 2018, Acadia reported a noteworthy $223.8 million in sales for the full year, representing a healthy 79% increase over the prior year.

The drug's commercial trajectory is also showing no signs of reaching a plateau. During the first quarter of 2019, for instance, Nuplazid's PDP sales grew by a whopping 29% to $63 million, compared to the same period a year ago. Moreover, Wall Street expects this high double-digit level of sales growth to continue over the course of 2020. Acadia's shares, in turn, are presently trading at around eight times next year's revenue. That's not an outlandish valuation within the biotech space, but it certainly isn't bargain territory, either. 

What does this all mean? Acadia arguably needs to tack on at least one additional indication to Nuplazid's label to justify its premium valuation. The company does have another drug, trofinetide, in late-stage development for the rare neurological disorder known as Rett syndrome, but it could be a few years before this second candidate bears fruit. So, Nuplazid's next late-stage readout in dementia-related psychosis that's slated for early 2020 needs to be an unmitigated success. Otherwise, Acadia's shares could tumble even further. 

Is Acadia worth the risk? The market was clearly banking on Nuplazid becoming a multi-indication drug based on the biotech's above-average valuation -- a thesis that is now very much in doubt with this late-stage flop in schizophrenia. Acadia could ultimately turn things around with a win in dementia-related psychosis, but clinical trials are always a high-risk endeavor. Investors, therefore, might want to think twice before trying to bottom fish with this commercial-stage biotech.  

The case for and against Dynavax 

Dynavax has now lost almost 80% of its value over the prior 12 months. What's weighing on this biotech's stock? Three things:

  1. Dynavax's hepatitis B vaccine Heplisav-B has gotten off to an extremely sluggish start sales-wise.
  2. The company recently announced a restructuring effort designed to dramatically cut costs and beef up Heplisav-B's ongoing commercialization. In doing so, the biotech essentially waved the white flag on its nascent oncology pipeline. 
  3. CEO Eddie Gray abruptly announced his retirement earlier this year. While Dynavax hasn't performed particularly well as a growth vehicle during Gray's tenure, the market rarely cheers a sudden and unexpected change in management.

Should investors give the company a pass? On the one hand, Heplisav-B has the potential to become the market share leader among FDA-approved hepatitis B vaccines. The problem is that the company has yet to prove that it can effectively capitalize on Heplisav-B's healthy commercial opportunity. 

Bottom line: Dynavax's shares are probably going to continue to fade until Heplisav-B's sales pick up in a big way. Thus, it might be best to avoid this falling knife right now. 

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George Budwell has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.