2 health care stocks preparing for a skyrocketing rise in the fourth quarter

growth vector healthcare stock Investors have been trending lower since the start of the fourth quarter of 2021. Investors have shunned this asset class in response to rising interest rates, industry-specific risks arising from the conflict in Ukraine, unfavorable foreign exchange rates, and a wave of profits—following the stellar performance of healthcare over the extended period. From March 2020 to March 2021. SPDR S&P Biotech ETF More than doubled in value during this hectic period for healthcare stocks in general.

The good news is that this prolonged bear market may start to reverse. As a guide, Major Morningstar Healthcare Industry Index It rose 2.5% over the previous four weeks, despite the abundance of less-than-ideal macroeconomic data over the period. For context, the Standard & Poor’s 500 lost 0.41% and Nasdaq Composite It sank 6.22% over the same time frame. Thus, it appears that health-care stocks are gradually emerging from their long stagnation.

Medical equipment above an open laptop.

Image source: Getty Images.

Which healthcare stocks are the most compelling buy as market conditions slowly improve? Hepatologist Madrigal Pharmaceuticals (NASDAQ: MDGL) Manufacturer of central nervous system drugs Axsome Treatments (NASDAQ: AXSM) Two names could rise sharply in the coming months. Here’s why.

Madrigal: This clinical trigger could be a game-changer

Wall Street is expecting big things from Madrigal Pharmaceuticals later this year. The inside information is that the company is due to release top-line data from the Phase 3 biopsy study sometime in the fourth quarter of 2022.

This pivotal trial, designed to assess the safety and efficacy of a once-daily selective thyroxine receptor agonist, in the treatment of patients with nonalcoholic steatohepatitis (NASH), may be beneficial. Billions in future revenue. As a direct result, Wall Street believes that a positive re-measurement reading in this highly valued index could push biotech stocks north by as much as 134% from current levels.

What is the danger? NASH has proven difficult to crack. To date, each late-stage compound has failed to show clear signs of efficacy in this common liver disease, has been bogged down by safety concerns, and/or has shown an unfavorable profile for drug–drug interaction. Thus, the Food and Drug Administration (FDA) has not yet approved a single drug for this often fatal liver condition.

Will Resmetirom be the first NASH drug approved by the FDA? While the drug’s emerging clinical profile appears to point to a victory in this upcoming data, history has shown that it is impossible to impede trials of NASH drugs. Conversely, investors may want to hold any initial position on the small side until the results of the study become a known quantity and the market has had time to reflect on the details.

Axsome: All eyes are on the launch of new drugs in biopharmaceuticals

Just under three weeks ago, Axsome announced that its newly approved major depressive disorder (MDD) drug, Auvelity, was officially available by prescription in the United States. Since that announcement, Axsome’s stock is up about 30%.

while the exactly the reason Since this sudden upside is up for debate, there is no doubt that the commercial stage biotech stock may still be undervalued. To put it simply, Axsome’s $2.44 billion market cap simply doesn’t reflect Auvelity’s massive business potential.

Speaking of which point, this new MDD drug is expected to generate nearly $2 billion in annual sales at its peak. Historically, most commercial-stage biotech stocks are trading at at least three times the estimated peak sales of their flagship products — meaning that Axsome’s stock could be undervalued by as much as 145% at current levels.

What can be gained in the short term for the company? Axsome is set to reveal third-quarter results for 2022 next week. Although the company probably won’t have much to report from a revenue generation standpoint, Axsome’s results may provide some crucial insights into the company’s near-term trajectory.

What key issue should investors look for when Axsome reports its third-quarter earnings? Most of the newly minted commercial-stage biotechnology companies struggle to persuade healthcare providers to accept their products. To avoid this common predicament, Axsome may choose to partner with a large, deep-pocketed pharmaceutical company in the commercial launch of Auvelity.

What’s important to understand is that the partnership is likely to come with a significant cash advance, as well as a potential equity stake – a share that could develop into a full buyout – from an established player in the field. Furthermore, a joint promotional deal, particularly one with a high-profile neuroscience company, would take much of the risk of Auvelity’s marketing.

Overall, Axsome stock appears poised to continue its upward path due to the massive commercial opportunity for Auvelity, along with the distinct possibility that a major pharmaceutical company could acquire an ownership stake in this new MDD drug sometime soon.

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George Bodwell He has positions at Axsome Therapeutics. Motley Fool has positions at and recommends Axsome Therapeutics and SPDR S&P Biotech. Motley Fool owns a profile Disclosure Policy.

The opinions and opinions expressed here are those of the author and do not necessarily reflect the views and opinions of Nasdaq, Inc.

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