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2 Beaten-Down Stocks That Still Aren't Worth Buying

Motley Fool - Fri Aug 11, 2023

As conventional investment wisdom has it, it's best to buy low and sell high. However, that only works when you have solid reasons to believe a company's shares will bounce back meaningfully after a decline.

Some corporations have uncertain prospects that make their shares not worth buying, even on the dip. Let's look at two companies that fit this description: Novavax(NASDAQ: NVAX) and Sage Therapeutics(NASDAQ: SAGE). Here's why if you're considering opening positions in either biotech stock, you might save yourself the trouble.

1. Novavax

Novavax is suffering the same fate as some other coronavirus vaccine makers that enjoyed impressive runs. With the COVID-19 pandemic receding, the need for vaccines isn't as urgent as it once was. Of course, COVID is likely here to stay. A recent surge in confirmed cases highlights that fact quite well.

So it will still be necessary for many people -- particularly those at high risk of contracting severe cases of the disease -- to get reinoculated, perhaps every year. But Novavax is unlikely to grab enough of this market to make its shares worth buying. The biotech took too long to earn authorization for its vaccine (due to manufacturing issues) in the U.S., leaving its competitors to capture most of the market.

Nothing about Novavax's vaccine allowed it to make up for lost time. The company had bet on developing a protein-based option that people would be less skeptical of, compared to the mRNA-based ones that dominated the U.S. market. That bet fell flat. Nor was Novavax's vaccine particularly more effective than that of its competitors.

It is true that Novavax's sales grew in the second quarter; the company's total revenue of $424.4 million increased by 128%. But for the full fiscal year, it expects revenue between $1.3 billion and $1.5 billion -- a decrease from its previous guidance of $1.4 billion to $1.6 billion. Last year, Novavax generated about $2 billion.

The company is still making money from advance purchase agreements it signed. But the coronavirus vaccine is now switching to its commercial phase, in which the biotech will mostly have to target patients.

This market is uncertain and will likely fluctuate somewhat based on COVID-19 cases. And because Novavax has no other commercialized product, and is not a leader in this space, it's hard to bet on the company to generate steadily growing revenue and earnings. Its other candidates are still far from earning approval. That puts Novavax's medium-term prospects seriously in doubt, and highlights why investors should stay away, at least for now.

2. Sage Therapeutics

Sage Therapeutics recently saw its shares plunge by more than 50% in one day when it failed to earn approval from the U.S. Food and Drug Administration (FDA) for Zurzuvae in treating major depressive disorder (MDD). The medicine did, however, earn the nod in treating postpartum depression (PPD).

Here's the problem: The market opportunity in MDD is much larger than that in PPD. Moreover, the FDA declined to approve Zurzuvae for MDD because the agency didn't think the data from Sage's clinical trials was convincing enough.

That is one of the worst reasons for a regulatory thumbs-down. Things might have been different if the FDA had pointed to manufacturing issues that could be resolved quickly. Sage Therapeutics and its partner on these programs, biotech giant Biogen, now have to run an additional clinical trial (or more than one) to demonstrate the efficacy of Zurzuvae in treating MDD.

Sage Therapeutics does have some redeeming qualities. The company now has two approved products on the market, Zurzuvae and Zulresso, both of which treat PPD. It also has a relatively solid cash position: It ended the second quarter with $1 billion in cash and equivalents, compared to $1.1 billion at the end of the first quarter. For a biotech with a market cap of $1.2 billion, that's not bad at all.

However, Sage Therapeutics doesn't generate much in sales. In the second quarter, it racked up $2.5 million in total revenue, nearly 65% higher than the year-ago period. Zurzuvae and Zulresso should continue growing their sales, but that will take time. Moreover, Sage Therapeutics is consistently unprofitable, and none of its other programs are in phase 3 studies.

The company looks overvalued even after the drop it recently experienced, so I believe investors should look at other biotech stocks instead.

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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool recommends Biogen. The Motley Fool has a disclosure policy.

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