Concerned the window might be closing as global economic headwinds threaten to increase in velocity, dozens of privately held companies have scrambled to complete initial public offerings (IPOs) in recent months. Many of the newest publicly traded companies call the healthcare sector home, and keeping track of all the new potential opportunities can be challenging for individual investors.
While there were some relatively well-known businesses in the recent batch of IPOs, investors might be especially intrigued by two small-cap biotech stocks that are flying under the radar: molecular data mining pioneer Personalis (PSNL 6.61%) and early-stage immuno-oncology company NextCure (NXTC 1.91%). Both companies are developing technology platforms catching the eyes of deep-pocketed customers and partners.
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Finding patterns others are overlooking
Drug research and clinical trials are expensive. In fact, companies spend an average of $60,000 in direct expenses per patient when conducting biopharmaceutical clinical trials. Much of that cost comprises unavoidable regulatory expenses to ensure quality control and patient safety, but surely there's some inefficiency baked into that number, right? Personalis thinks so -- and it sees a significant opportunity.
The company argues some of the inefficiency in clinical trials stems from using the wrong tools. For instance, a biopharmaceutical drug developer enrolling patients in a new trial might be working with limited genetic data about the individuals and the slight -- but incredibly important -- genetic differences harbored by their cancers. That's because most diagnostic cancer panels look at only 50 to 500 genes from collected tissue samples, and can rarely tease out immune cell interactions. That's why Personalis designed its NeXT Platform to provide comprehensive molecular data on all 20,000 human genes and the activity of tumor-infiltrating lymphocytes (TILs).
Personalis thinks more and better data can help identify why some patients respond to treatment when others don't, better understand the mechanisms at play between the immune system and cancer cells, match patients with alternative treatments to improve outcomes, and bolster drug discovery efforts before hundreds of millions of dollars in research and development expenses are incurred only to cough up a failed outcome. It appears customers agree.
The business has sold services to 45 different biopharma companies since its inception. In the first quarter of 2019, the business reported $14.1 million in total revenue, marking a 238% increase from the year-ago period, and a manageable operating loss of $5.4 million. That growth trajectory should continue for the foreseeable future.
In addition to the existing molecular data mining platform powered by tissue samples, Personalis expects to launch a liquid biopsy test -- which will also capable of reading all 20,000 or so human genes -- in early 2020. Combining the information collected from a tissue biopsy and blood biopsy could significantly increase the value of the NeXT Platform, since certain crucial data (such as gene expression and the detailed activity of the immune system) are only available from tissue samples. Companies focused solely on liquid biopsies wouldn't have that capability.
Nonetheless, Wall Street seems to be punishing Personalis for focusing on biopharma customers and clinical trials; the company's peers are developing liquid biopsy products that will be broadly marketed. Investors with a long-term mindset might disagree with Wall Street's assessment, however. After all, Personalis sees a $5 billion market opportunity in cancer immunotherapy clinical trials initiated in 2018 -- a number that will surely grow. At a market cap of less than $700 million, this recent biotech IPO is certainly worth a closer look, or perhaps a small part of your portfolio.
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Addressing the unmet needs of cancer patients
These days it seems like every company boasts about owning a novel discovery platform for finding the next blockbuster cancer treatment, but individual investors might find reasons to take a closer look at NextCure's claims. The company's FIND-IO platform scans cell surfaces and the molecules cancer cells secrete to better understand how cancer spreads, grows, and disguises itself from the immune system, then develops drug candidates that disrupt those pathways. Eli Lilly (LLY -2.63%) is currently exploring the potential of the discovery engine -- and could pay up to $1.4 billion in total milestone payments.
NextCure is also moving ahead with drug development efforts of its own. The lead drug candidate, NC318, is the first in the industry to target the Siglec-15 (S15) protein that's secreted in the tumor microenvironment (TME) and suppresses immune cell function. The company thinks inhibiting S15 could improve outcomes for the estimated 60% to 70% of cancer patients who fail to respond to existing checkpoint inhibitor drugs targeting PD-1, PD-L1, and CTLA-4. Such drugs have limited success for patients, but still raked in more than $17 billion in global sales last year.
The second drug candidate, NC410, inhibits the LAIR-1 protein, which also suppresses immune cell activity in the TME. There's evidence from existing databases that higher levels of LAIR-1 expression correlates with poorer prognoses in cancer patients, specifically in ovarian cancer, kidney cancer, and non-small cell lung cancer. NextCure has also found, through its FIND-IO platform, that the LAIR-1 signaling pathway can be targeted more directly to treat inflammation associated with cancer and autoimmune diseases, but those next-generation drug candidates aren't expected to hit the clinic until 2021.
Investors have to remember that NextCure remains in the earliest stages of drug development and faces a long road ahead, but major events are on the horizon. Results from a phase 1 clinical trial evaluating NC318 should be available in the fourth quarter of 2019, the investigational new drug (IND) application for NC410 is expected to be filed in the first quarter of 2020 (meaning clinical trials could potentially begin in 2020), and a phase 2 trial for NC318 could be wrapped up by the end of 2020.
A market cap of $400 million suggests Wall Street isn't paying much attention to NextCure right now, but successful early results for NC318 could alter that stance. Individual investors may want to keep a close eye on the company, while those with an above-average appetite for risk might be willing to open a small position already.
