DaLiu
~ By Ashutosh Gowli, Marketplace Specialist
Thank you to all readers of our first part of the 2023 Look Ahead Roundtable Series. So far we’ve covered Macro, Value Stocks, Commodities, Dividends, Income And REITs and Growth, Tech And Crypto.
Today, we continue with Biotech And Healthcare analysis coverage with analysis and top ideas from three of our contributors.
Once again, the questions we asked were:
What are you expecting and/or looking for in your area of focus for 2023?
What is one of your top ideas for 2023 and why?
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Jonathan Faison of ROTY Biotech Community: A “thinning of the herd” phase continues to take place in the biotech sector, with many small-cap names trading near the value of cash on the balance sheet and a number of liquidations taking place. There were quite a few significant M&A events in 2022, such as Horizon Therapeutics (NASDAQ:HZNP) by Amgen for $26 billion. Unfortunately, these appeared to have little impact on the sector (at least for the short term). Mean performance for 2021 biotech IPOs was negative 50% and smaller companies ($200M to $500M market capitalization) bore the brunt of the bear market (average performance in 2022 of negative 58%).
One ray of hope I would point out though for 2023 (and years to follow) is that the pendulum inevitably swings back and forth for each sector and asset class from pessimism to optimism, unloved to irrational exuberance. Biotech will have its day again, even if we are not out of the woods yet with the coming recession.
Idea: TELA Bio (NASDAQ:TELA)- $215M Market Capitalization, $160M enterprise value. While technically a medical device-type name, TELA accounts for a 12% portfolio weighting in our Core Biotech portfolio. This soft tissue and preservation company is focused on penetrating two major markets, one being hernia repair and the other being plastic and reconstructive surgery (usually after cancer). These market opportunities total over $2 billion and TELA Bio has a novel set of products backed by tunable technology platform with strong IP portfolio. What I like most is that they have multiple tailwinds and drivers of sales growth, from GPO (Group Purchasing Organization) wins to class action lawsuits driving doctors and patients away from Gen 1 products to superior clinical data as seen in very low recurrence rates. Clinical data also looks superior to newer resorbable meshes being employed by the bigger players like AbbVie or BD. In the near term, I expect the breakout to continue as 2nd GPO contract (Premier) started contributing to sales in October and a 3rd is likely on the way.
Disclosure: Long TELA
Alan Brochstein of 420 Investor: The cannabis sector was under pressure from February 2021 into the end of 2022. Sentiment is very negative, and the fundamentals have been challenged. I envision the fundamentals improving, which should improve the stocks a lot. There are some wildcards too, like the ending of 280E taxation and the allowance by Nasdaq of American cannabis companies to list on their exchange. Either of these things would cause even greater returns than I envision.
Idea: My top idea in general is the ancillary sub-sector, which was really beaten up in 2022. Weakness in the customer base caused investors to be negative, but it also hurt revenue and profitability. There are many ideas that I like, but for this, I select WM Technology (NASDAQ:MAPS). The stock ended the year near $1 and revised its outlook lower. It ended 2021 near $6, and it during 2021 mainly above $10.
Analysts currently expect the company to see revenue fall 1% in 2023 but to increase by 22% in 2024 to $258 million. The company has no debt and a reasonable amount of cash ($34 million at 9/30/22). The market cap at $1.01 on 12/31 was $232 million, 1.1X projected 2023 sales. My outlook for 2023 year-end is that it will trade at 3X projected 2024 revenue, or $774 million. This is a price of $3.37 and 32X projected 2024 EBITDA of $24 million (a margin of 9.4%, which is way below its 2021 margin of 16.4% and is likely going to be higher).
Disclosure: N/A
ONeil Trader of Growth Stock Forum: Although our model portfolio delivered a 14.9% gain, 2022 was a very challenging year. Biotech stocks looked a lot more resilient in the second half of 2022, and I believe there’s potential for biotech stocks to outperform in 2023 and with broader participation than in the second half of 2022 as large biopharma was the group that outperformed.
Regarding areas I’m focusing on, I’m still favoring small- and mid-cap biotech stocks with a heavier focus on rare diseases and preferably companies with candidates in at least mid- or late-stage development and companies that already have approved products.
Idea: There are nine stocks on our Top Picks list for 2023, and I will single out Viridian Therapeutics (NASDAQ:VRDN). Viridian is developing three candidates for the treatment of thyroid eye disease (‘TED’) and the lead candidate VRDN-001 has demonstrated a strong efficacy signal in the early-stage trial in TED patients. VRDN-001 is IV-administered, and the next-generation candidates VRDN-002 and VRDN-003 are subcutaneously administered.
I believe Viridian is well positioned to capture market share from our former portfolio holding Horizon Therapeutics (which is being acquired by Amgen) and while my base case is that VRDN-001 will have similar efficacy to Horizon’s Tepezza and that VRDN-002 or VRDN-003 will have improved convenience compared to Tepezza, there’s a more bullish scenario where VRDN-001 has improved efficacy compared to Tepezza as we have seen hints of that in the phase 1/2 trial last year.
And while I see Viridian as capable of delivering value as a standalone entity, I also see it as an attractive takeover candidate. We know Sanofi and J&J were interested in acquiring Horizon, and they may now turn to Viridian as an alternative way of entering the attractive TED market.
Disclosure: VRDN
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
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