With the coronavirus outbreak spreading rapidly in countries beyond China, so is the fear among investors. Yesterday marked the S&P 500’s worst one-day performance since February 2018 as the index slipped 3%. The impacts were felt outside of the U.S. market as well; European markets dropped to their lowest point since 2016 and the sell-off continued in Asia.
On Monday, investor concern spiked after Italy and South Korea reported that the number of infections had grown. South Korea, which stated that it could use emergency powers to aid its containment efforts, announced 231 new cases. In Italy, police and military forces locked down 11 towns and prohibited 50,000 people from movement as officials reported the number of cases reached 219.
Baird’s chief investment strategist Bruce Bittles notes, “There was a cavalier attitude about the virus.” However, with the number of infections rising worldwide, he argues, “you have to think about the global economy slipping enough to cause a shortfall in earnings.”
Having said that, there was a bright spot in yesterday’s doom and gloom as the World Health Organization reported that since February 2, new cases in China have been on the decline. Additionally, Wall Street analysts remind investors that safe-havens can be found as the broader market experiences weakness, specifically pointing to the healthcare sector.
With this in mind, we used TipRanks’ Stock Screener tool to zero in on 3 healthcare stocks that have amassed enough bullish support from the analyst community to earn a “Strong Buy” consensus rating. Not to mention each boasts some serious upside potential from current levels. Let’s read out the data.
Gritstone Oncology Inc. (GRTS)
Gritstone Oncology is working to eradicate cancer with its personalized immunotherapies to fight multiple types of cancer. Unlike some of its peers, its unique approach focuses on the individual nature of tumors, triggering a therapeutic immune response by harnessing the natural power of a patient’s immune system to recognize tumor antigens. While shares have taken a tumble yesterday, Cowen analyst Marc Frahm still sees big things in store.
After hosting a dinner with members of Gritstone’s management team as well as Columbia physician Dr. Charles Drake, the analyst came away more confident in its development programs. According to Dr. Drake, “emerging data from PD-1 studies makes it clear that while some long-term responders may achieve sterilizing immunity and therefore not need long-lived T cell memory, at least 20% of long-term responders are actually in a homeostatic state with persistent very low levels of disease being controlled by constant immune pressure.”
As a result, an effective immuno-oncology (IO) therapy must produce a large amount of IFN-gamma producing cytotoxic CD8+ T cells to reduce tumor volumes. However, it’s challenging to figure out the precise number of T cells that are necessary, which in turn, makes it difficult to define a threshold that a vaccine must achieve.
Taking all of this into consideration, Frahm tells investors that Dr. Drake believes Gritstone’s GRANITE and SLATE neoantigen vaccines are “impressive." The physician argues that in the cancer vaccine segment, both the magnitude and the quality of T cells being produced are unheard of. The analyst noted, “He attributes this to (1) the choice of a heterologous prime boost vaccination strategy, (2) the use of an AdV-vector for the priming step, and (3) the use of neoantigens rather than cancer testis antigens.”
Bearing this in mind, Frahm sides with the bulls on this healthcare company. The four-star analyst reiterated an Outperform rating, but declined to set a price target on the stock. (To watch Frahm’s track record, click here)
Out on Wall Street, the analysts are in agreement. With 100% Street support, 5 Buys (in the past 3 months) to be exact, the message is clear: GRTS is a Strong Buy. In addition, the $25.50 average price target suggests shares could soar 187% over the next year. (See Gritstone stock analysis on TipRanks)
Epizyme, Inc. (EPZM)
Epizyme specializes in epigenetics as well as small molecule inhibitor development. These molecules are designed to work against histone methyltransferases (HMTs), which play a significant part in gene expression regulation. While shares tumbled 13% yesterday on the back of the Coronavirus fears, Cowen analyst Yaron Werber believes that “Epizyme is a classic turnaround that is emerging from hardship.”
Werber tells clients that Tazverik, its oral small molecule inhibitor of EZH2, is a significant component of his bullish thesis. The therapy, which was approved for an epithelioid sarcoma (ES) indication in January and launched at the beginning of this month, is de-risked following the FDA ruling. Adding to the good news, Tazverik was added to the National Comprehensive Cancer Network’s (NCCN) Clinical Practice Guidelines in Oncology as a recommended ES treatment. “We think that the NCCN guidelines inclusion will be highly positive for Tazverik to overcome the reimbursement barrier and accelerate the uptake in ES,” Werber commented.
Additionally, EPZM filed an sNDA for the therapy’s use in patients with follicular lymphoma (FL), and is on target with the FDA’s Priority Review timeline for its June 18 PDUFA date. Based on clinical data, Werber argues that Tazverik’s oral dosing and “clean” safety profile make approval likely, with this new indication lending itself to possible gains.
While some investors have expressed concern about the therapy’s use in FL, Werber remains confident. “Data in the bigger EZH2 WT is less robust but still approvable given the drug’s meaningful efficacy and clean safety profile. Concerns about partial clinical hold due to secondary malignancy in one patient are overdone and was addressed with labeling. We believe that the stock offers an attractive profile given the upside potential for this late stage asset,” he explained.
As management stated it has $381.1 million in cash and a $50 million option sold to Royalty Pharma, the deal is sealed for Werber. However, in addition to maintaining his bullish call, the five-star analyst decreased the price target from $36 to $32. That being said, the target still leaves room for a twelve-month gain of 48%. (To watch Werber’s track record, click here)
Turning now to the rest of the Street, other analysts also have high hopes for the healthcare name. Out of 8 reviews published in the last three months, 7 were bullish, making the consensus rating a Strong Buy. At $27.63, the average price target implies 28% upside potential. (See Epizyme stock analysis on TipRanks)
Evelo Biosciences, Inc. (EVLO)
Evelo Biosciences stock is another healthcare name that unfairly beaten down by the coronavirus. While share tumbled nearly 13% yesterday, the Street is still betting on EVLO.
Using its integrated platform, Evelo Biosciences develops oral biologics that utilize the central role that cells in the small intestine play in various systems of the body. With this approach, the company has been able to design product candidates for several inflammatory diseases and cancer.
The company has recently decided to discontinue its EDP1066 candidate in atopic dermatitis, and Chris Shibutani of Cowen sees EPD1815, the comapny's lead candidate in the psoriasis and atopic dermatitis indications, as possibly being able to show “clinical efficacy in inflammatory indications."
The four-star analyst added, “We view this decision as prudent, given that EDP1815 showed preliminary activity in at least one indication (psoriasis). EVLO noted that the decision was not made on the basis of safety, but rather on the atopic dermatitis data. No meaningful safety issues have been identified with monoclonal microbials to date, to our knowledge.”
On top of this, Shibutani is looking forward to updates on the Phase 1/2 trial of EDP1503 and pembrolizumab in the first half of 2020. Calling the data readout a potential catalyst, the analyst is hoping to see a response in patients with microsatellite stable colorectal cancer (MSS CRC), triple-negative breast cancer or other tumor types who have experienced a relapse on prior PD-1/L1 inhibitor treatment.
Given all that EVLO has going for it, Shibutani left his Outperform rating unchanged. The analyst declined to issue a price target, though. (To watch Shibutani’s track record, click here)
What does the rest of the Street have to say? It turns out that other analysts have also been impressed by EVLO. A Strong Buy consensus rating breaks down into 3 Buys and 1 Hold assigned in the last three months. Not to mention the $20 average price target puts the upside potential at a whopping 280%. (See Evelo stock analysis on TipRanks)