2 Biotech Stocks to Avoid in September

Protagonist Therapeutics Inc. (PTGX) and TCR2 Therapeutics Inc. (TCRR) have plunged in the past week, after disappointing results of their respective clinical trials. The news has created bearish momentum for each stock that is unlikely to reverse in the near term. 

So far, both companies are in the early clinical trial phase of developing their molecules, and investing now implies high risks, low reward. In other words, investing in either is much like a gamble.

However, let’s analyze these two biotech stocks and see why you should avoid them in the short term.

Protagonist Therapeutics Inc. (PTGX)

PTGX is a clinical-stage biopharmaceutical company that uses its peptide technology platform to discover and develop peptide-based drugs to address unmet medical needs. Its clinical programs fall under two categories of diseases, which include hematology and blood disorders, as well as inflammatory and immunomodulatory diseases. Its lead clinical asset, rusfertide (PTG-300), is an injectable hepcidin mimetic in development for the treatment of erythrocytosis, iron overload, and other blood disorders. 

The company’s other clinical assets, PTG-943 and PTG-200, are orally delivered investigational drugs in development for inflammatory bowel disease (IBD) that are designed to block biological pathways targeted by marketed injectable antibody drugs. Its PN-235 and PN-232 are in clinical development, which are IL-R antagonists.

PTGX share dipped 12.3% year-to-date underperforming its benchmark the Health Care Select Sector SPDR Fund (XLV), which advanced 16.2% since the beginning of the year. 

Last week, shares of PTGX fell more than 60% after the U.S. Food and Drug Administration placed a clinical hold on studies of rusfertide, the company’s lead investigational new drug candidate. The hold came after benign and malignant subcutaneous skin tumors were observed in a transgenic mouse model study designed to detect signals related to tumorigenicity, or the tendency to produce tumors.

In terms of financials, the company’s net sales are expected to decrease robustly in 2021, down 50.3% year-on-year to $142m, but analysts expect a strong rebound in 2022, up 3x to $427m. As regards PTGX’s bottom line, the company’s net loss should decelerate this year to a loss of $117m compared to $662m in 2020. Nevertheless, the consensus of analysts is not expecting a turnaround anytime soon, pointing toward additional selling pressure on the stock price. 

Therefore, PTGX’s balance sheet is slowly deteriorating as time passes. The biopharmaceutical company has a net cash position of $250m in 2021, down 18.3% year-on-year, yet with its yearly cash burns, the company will soon need to issue more shares to continue its clinical trials. 

Despite the strong depreciation of PTGX’s share price, valuation metrics remain high, with a 2022e EV/Revenue of 15.3x.

TCR2 Therapeutics Inc. (TCRR)

TCRR is a clinical-stage cell therapy company with a pipeline of novel T cell therapies for patients suffering from cancer. The company’s T cell receptor (TCR) Fusion Construct T cells (TRuC-T cells) specifically recognizes and kills cancer cells by harnessing the entire T cell receptor (TCR) signaling complex. TCRR has demonstrated anti-tumor activity of TRuC-T cells in preclinical models across various tumor targets. The company has also developed combinations of TRuC variants with elements designed to sustain the immunotherapeutic response and counteract the immunosuppressive tumor microenvironment. Its platform is highlighted with multiple programs of product candidates, which include TC-210, TC-220, TC-410, TC-110, and TC-310.

The stock of TCRR tumbled 71.1% since the beginning of the year, following interim results from an ongoing phase 1 clinical trial on its mesothelin-expressing solid tumors. The company said the overall response rate was 31% in patients infused with gavo-cel following lymphodepletion.

The fundamental picture of TCRR has deteriorated gradually, as the company continues the research and development of its products. Yet, the company is not selling any product for the moment and TCRR is expected to incur a massive loss of $990m in 2021, compared to a net loss of $671m in 2020. 

Nevertheless, TCRR is actively investing in finding a therapy for patients suffering from cancer, raising Capex by 21.4% in 2021 to a whopping $869m. The company is expected to have a cash position of $230m in 2021 and should lift by 3x in 2022 to $734m, by issuing debt or new shares. 

Despite this, valuation metrics remain high, as TCRR’s share trades at a 2023e EV/Revenue of 36.3x.

Take away

The stock price of PTGX and TCRR have been beaten down in the past week after the companies published disappointing clinical results. While some investors might consider these dips as buying opportunities, the risks are too high to enter these healthcare stocks, given that both of the companies are still in the developing phase of their respective therapies. In this context, investors should avoid PTGX and TCRR.