On June 10, Chair of the Federal Reserve Jerome Powell cautioned that an economic recovery won't be quick or painless. Considering Wall Street had already priced in a relatively optimistic recovery scenario, it's not too surprising Powell's comments popped the stock market's rally. It doesn't help that a handful of states are reporting case and hospitalization figures that suggest a second wave of coronavirus infections -- and subsequently, more restrictions on movement -- could be on the horizon.
Amid all of the uncertainty, the only thing individual investors can be certain of is that volatility is here to stay. But that doesn't necessarily make it a bad time to buy stocks. The key is to focus on the long term, which is exactly why Coherus BioSciences (CHRS 2.23%) and Dicerna Pharmaceuticals (DRNA +0.00%) are two of the top small-cap stocks to take a closer look at right now.
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Well positioned to exit the slowdown better off
Despite an impressive and growing list of accomplishments, Coherus BioSciences just can't do enough to impress Wall Street. Individual investors with a long-term mindset can take advantage of that undervaluation.
Coherus BioSciences is striving to become a leading developer of biosimilar drugs, which are copycat versions of biologic drugs. They're more difficult to develop, manufacture, store, and distribute than small molecule drugs, which keeps competition low and market opportunities large. The business has shown investors what success in the fledgling market can look like.
Udenyca, the company's first product, is a biosimilar of Neulasta (pegfilgrastim) from Amgen, which is used to stimulate the production of white blood cells in patients receiving chemotherapy. The biosimilar hit the market early last year and became the most successful drug launch of 2019. Coherus BioSciences reported full-year 2019 revenue of $356 million (all from Udenyca sales) and operating income of $107 million.
The momentum continued in the first quarter of 2020, as evidenced by $116 million in Udenyca sales (equivalent to $464 million in revenue on an annualized basis). Although the coronavirus pandemic has created some friction in getting the product to patients, Coherus BioSciences expects to generate positive cash flow from operations for the year. It ended March with $193 million in cash and completed a $230 million debt offering in April, so investors certainly don't have to worry about financial flexibility.
While Wall Street has been concerned that other Neulasta biosimilars will erode Udenyca's market share, that simply hasn't materialized. In fact, Coherus BioSciences was second to market behind Mylan, which produces Fulphila, but quickly took over. Udenyca ended 2019 with 20.5% of all unit sales for pegfilgrastim-based drugs, compared to only about 5% for Fulphila. More pegfilgrastim biosimilars are on the market or on the way (from companies including Novartis' Sandoz, Fresenius Kabi, and Pfizer, to name a few), but Udenyca has clearly carved out a leadership position. Management is confident Udenyca can hold onto at least 20% of the market.
More importantly, Coherus BioSciences isn't wasting its early success. The business has forged deals or closed acquisitions to bolster its biosimilar pipeline with copycat versions of blockbuster drugs such as Avastin, Lucentis, Eylea, Humira, and others. If all goes according to plan, the company could have at least five biosimilar products on the market by 2025. Simply put, investors worried about the company being a one-trick pony today can be comforted by its strong financial position and focus on the future.
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Little data, but loaded with cash and partnerships
Unlike Coherus BioSciences, Dicerna Pharmaceuticals is a development-stage company without a single marketed drug product. But what it lacks in commercial credentials it more than makes up for with pipeline potential. The company is all-in on RNA interference (RNAi) technology, which is having a bit of a renaissance after years of hype and public failures.
The timing has worked out well for Dicerna Pharmaceuticals. The business has inked drug development partnerships with six of the world's top pharmaceutical companies. All of the upfront payments and equity investments helped the company end March with $707 million in cash -- half of its current market cap. That means the company could fund operations for several years with cash on hand, although the clinical progress made in that time would almost certainly earn significant milestone payments from collaboration pacts.
It's an intriguing financial situation for individual investors to ponder. On the one hand, Dicerna Pharmaceuticals is one of the most de-risked development-stage biopharmas on the market. A lack of risk could be worth a premium given the uncertainty gripping 2020. On the other hand, it sure would be nice to back up the development deals with robust clinical results, which are mostly lacking at this time.
Data should be on the way soon. Dicerna Pharmaceuticals expects to report pipeline updates at its R&D Day in August. That includes data for the lead drug candidate, nedosiran in primary hyperoxaluria, and an early-stage asset developed with Roche that's being evaluated as a potential functional cure for chronic hepatitis B infection. If the latter lives up to the high bar set by RNAi drug candidates from Arrowhead Pharmaceuticals and Johnson & Johnson, the stock could earn a higher valuation.
That's not all investors have to look forward to at the upcoming R&D Day. Dicerna Pharmaceuticals will present data showing how its targeted delivery of RNAi therapeutics can be extended to tissue types beyond the liver, such as lung and muscle tissues. If Wall Street is convinced of the potential, then it could open up numerous new markets for the red-hot genetic medicine approach.
Although August seems far away now, the volatility gripping stock markets in mid-June could force Wall Street to place a premium value on the relatively de-risked development strategy of Dicerna Pharmaceuticals. Given the $1.5 billion market cap, that makes this small-cap stock a buy for investors with an appetite for risk and a long-term mindset.
