2 Beaten-Down Stocks to Avoid Right Now

The biotech industry is notoriously volatile. Drugmakers often face significant challenges that send their stocks plummeting. Sometimes that creates an attractive entry point, provided we can reasonably expect the company in question to bounce back. But at other times it's not worth investing in a biotech stock that has lost significant market value, as the risks are still too high.

That's the case with Intellia Therapeutics (NASDAQ: NTLA) and Sarepta Therapeutics (NASDAQ: SRPT). These two biotechs have faced headwinds this year that have sent their share prices sinking, but investors should think twice before buying the dip.

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1. Intellia Therapeutics

Gene-editing medicines have some advantages over more traditional therapies. They can address the root causes of some diseases, and even end up being one-time curative treatments. However, there are also drawbacks; these include challenges in manufacturing and administering them, and limited evidence on their potential side effects.

That brings us to Intellia Therapeutics, a clinical-stage biotech focused on gene editing. The company's two leading candidates, nexiguran ziclumeran (nex-z) and lonvoguran ziclumeran (lonvo-z), seem promising, as they target diseases with few therapy options. Nex-z is being developed for transthyretin amyloidosis, a rare disease in which a protein builds up in organs in abnormal amounts, causing a range of problems, including cardiovascular ones. Lonvo-z is targeting hereditary angioedema, a rare disease that causes painful swelling across the body. So far, so good.

Here's the bad news. Intellia recently reported that it had to pause its clinical trials for nex-z after a patient died from liver damage. We can't be sure that nex-z was the cause, but this episode highlights the risks of investing in clinical-stage biotechs, especially those specializing in gene editing.

What's next for Intellia Therapeutics? Regulators could lift the hold on the company's clinical trials for nex-z if the medicine is determined not responsible for the death. And given the fact that nex-z targets an area with high unmet needs, the U.S. Food and Drug Administration could be more lenient and approve the medicine either way -- while requiring it to come with an explicit warning for the possibility of liver failure.

Intellia Therapeutics is partnering with a biotech giant, Regeneron Pharmaceuticals, to develop this therapy, which should give it access to more funds than it would otherwise have. Intellia ended the third quarter with $670 million in cash and equivalents, which it believes will keep the lights on at least until mid-2027, giving it enough time to launch lonvo-z.

Meanwhile, the biotech is still working on other promising early-stage programs. Even so, the stock looks incredibly risky, given recent developments and the fact that much more could go wrong in the next couple of years. And failure to hit solid clinical and regulatory milestones will sink the stock price. That's why it's not worth it to invest in Intellia Therapeutics right now.

2. Sarepta Therapeutics

Sarepta Therapeutics has encountered a similar problem this year. The company's gene therapy for a rare, progressive muscle-wasting disease called Duchenne muscular dystrophy (DMD), Elevidys, was destined for stardom and blockbuster status. It was the only product in Sarepta's portfolio to address the genetic causes of DMD, and its sales were growing at a good clip. However, the biotech then reported that not one but two patients on Elevidys died from acute liver failure.

The setback sent the stock price plunging and affected demand for Elevidys, as reflected in Sarepta's financial results. In the third quarter, the company's total revenue declined by 15% year over year to $399.4 million. Sarepta reported a non-GAAP (adjusted, not based on generally accepted accounting principles) net loss per share of $0.13, versus the earnings per share of $0.64 recorded in the year-ago period.

Elevidys is still on the market while Sarepta talks things over with regulators. The company expects that it will have to remove Elevidys' indication in non-ambulatory DMD patients while including a box warning, all of which will further limit the medicine's sales potential. While the biotech has made strides toward fixing its business, there's more: A third patient died, also from acute liver failure, in a clinical trial for one of Sarepta's investigational gene therapies (albeit one it has since stopped developing).

If the problem had been confined to Elevidys, Sarepta's shares might have been attractive at a much lower price. But the risk of more clinical or regulatory setbacks seems too high, now that the drugmaker has experienced three deaths in one year for the same problem across two different medicines. For now, investors should watch this one from the sidelines.

Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Intellia Therapeutics and Regeneron Pharmaceuticals. The Motley Fool has a disclosure policy.