As biotech stock prices have fallen, Wall Street and biotech boards have grown increasingly unfriendly. Amid the turmoil, key biotech stocks have become the targets of activist investors demanding new executives, new boards and new strategies. The specifics of each case vary, but the biotech stocks in sharpest focus have been those whose earnings and revenue have disappointed investors.
Of course, it’s no accident this happens. Investors want to protect their investments. And if the company isn’t acting right, they are well within their rights to try to change. If their changes succeed, it could prove a key turnaround for a company’s future. Many high-potential biotech stocks could see themselves skyrocket after these changes — and investors know it.
But companies will always fight back. Change doesn’t happen easily, and overturning the inertia of the board, the executives and other shareholders takes time — sometimes quite a while. But these biotech stocks can still benefit from showing resilience during the turmoil and ending uncertainty afterward. A keen investor knows that a crisis is also an opportunity.
Ultimately, it’s important to know what’s at stake, whether you side with investors or companies. So, amid the turmoil, here are three high-potential biotech stocks to watch.
Biogen (BIIB)
Biogen’s (NASDAQ:BIIB) most promising drugs, Aduhelm and Leqembi, were expected to be game-changers. But investors have not been impressed. Both drugs are monoclonal antibodies designed to target beta-amyloid — a protein found clumped together in those with Alzheimer’s disease. Biogen’s initial rollout of these drugs generated significant excitement, but investor concerns led to a failed investor lawsuit and a new chief executive officer (CEO).
The controversy centered around the slow uptake of both drugs. Concerns about limited efficacy and potentially life-threatening side effects like brain bleeds have led some doctors to hesitate in prescribing them. Both Aduhelm and Leqembi have been slow to gain traction in the market. And investors claimed Biogen misled them, although a judge dismissed the case.
To assuage its investors, Biogen needs to find ways to improve the uptake of its flagship drugs. The company could focus on identifying patient subsets where the products have clear success rates, showing doctors they can be effective in certain populations — despite concerns. Or, Biogen could find ways to reduce the concerning side effects. Either way, safety and efficacy will be key to adoption.
Biogen’s financial situation is heading in the wrong direction, which is why these new drugs are so critical. Its Q2 2023 earnings showed revenue of $1.8 billion, down from $2.1 billion in Q2 2022. Net income decreased to $593 million from $1 billion in Q2 2022. Biogen has announced it will reduce staff by 11% to cut costs, but that may not be enough to satisfy investors.
Ultimately investors’ worries over the Alzheimer’s drug rollout have had an effect. But if Biogen can regain investors’ confidence, they could regain their crown as a high-potential biotech stock to buy.
Illumina (ILMN)
Illumina (NASDAQ:ILMN), a major player in genetic sequencing and a key biotech stock to watch, has faced a difficult battle with activist investor Carl Icahn. In 2021, Illumina acquired cancer detection company GRAIL in a vertical integration merger. Since GRAIL’s assays used Illumina equipment, this would have strengthened Illumina’s position in the market. However, antitrust regulators opposed the move, and Illumina was ordered to divest from the company in 2023.
Illumina fought a long battle with regulators, which raised the ire of Carl Icahn. Icahn believed the fight with regulators was detrimental to shareholders. He also sought to remove the chief executive officer (CEO) and install his own candidates to the board.
Icahn’s tactics worked, and his candidates were placed on the board while Illumina’s CEO resigned. The interim CEO will stay on until July 31, which puts Illumina at a crossroads. How much Icahn supports the new CEO could be crucial to the company’s long-term investor relations. Likewise, the new company executive could signal future priorities about whether Illumina will continue to seek vertical integration with companies using its products or focus on itself.
No matter what happens, Illumina is still a major player in genetic sequencing. While its Q1 2023 earnings report showed revenue and net income down from a year ago, it still has a huge customer base and room to grow. Whether the company continues to look outward or focus inward, it is still a high-potential biotech stock in the sequencing industry. That makes ILMN a biotech stock any investor should watch.
Exelixis (EXEL)
Exelixis (NASDAQ:EXEL) has been in a clash with Farallon Capital Management (privately held) over its R&D strategy. Farallon has expressed concerns about Exelixis’ oversized research and development (R&D) budget and its pursuit of various drug strategies. The company advocates for a more focused approach, concentrating on a few core competencies. Additionally, Farallon is pushing for a larger share buyback to further enhance shareholder value.
While Farallon is not pushing for overwhelming changes, it is still affecting Exelixis. During the initial skirmish, Farallon succeeded in securing three board seats. Exelixis tried to defend its strategy in the court of public opinion but did not persuade many investors.
Ultimately Exelixis remains at a crossroads, with Farallon demanding cuts and the company pushing for growth. If Exelixis can pull together a string of strong clinical trials or even drug approval, the company could defend its strategy more easily against Farallon. But if investors think revenue cannot meet R&D demands, they’ll be more likely to side with Farallon.
Exelixis’s Q1 2023 earnings report showed net product revenue growth from $310 million to $363 million. However, R&D expenses grew from $157 million to $234 million, decreasing net income from $68.6 million to $40 million. That highlights the turmoil with Farallon. If R&D continues to grow too fast, the company will become unprofitable. Investors should look toward Exelixis’ next earnings report on August 1st to see which direction the company is heading.
Ultimately, Exelixis versus Farallon is the classic battle between growth and profit. But Exelixis has proven to be a resilient biotech stock to watch.
On the date of publication, John Blankenhorn did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.