This Beaten-Down Drug Stock Is Down Over 10% -- Is It Finally a Buy?

The recent market volatility may have created opportunities to purchase attractive stocks -- those that could perform well over the medium term -- on the dip. Take Abivax (NASDAQ: ABVX), a France-based biotech. Abivax's stock has skyrocketed since last year, driven by excellent progress with its leading pipeline candidate. However, the company has cooled off this year, and its shares are down 11% since January, as of writing.

That said, with an upcoming catalyst and a highly promising lead product, Abivax could bounce back and deliver solid returns over the next half-decade. There are also risks to consider before hitting the "buy" button, though. Let's look deeper.

Image source: Getty Images.

Mark your calendar

Abivax is developing obefazimod as a potential treatment for ulcerative colitis (UC), a chronic inflammatory condition in which an overactive immune response in the gut leads to excessive cytokine (proteins that regulate the body's immune response) signaling. This causes inflammation and damage to the colon lining, leading to a range of symptoms, including abdominal cramping and diarrhea. Obefazimod boasts a novel, differentiated mechanism of action.

It works by increasing levels of a natural regulator of inflammation, microRNA-124, which, in turn, reduces the overproduction of pro-inflammatory cytokines and helps restore immune balance. Complicated science aside, obefazimod could be a commercial hit because it doesn't work the same way as many existing UC medicines do. Notably, immunosuppressants (as their name suggests) reduce immune system activity to prevent it from attacking healthy cells. They are effective at treating a range of immune conditions, but they can also make patients more susceptible to other diseases due to a weakened immune system.

Obefazimod is being developed to avoid this drawback while maintaining solid, perhaps even enhanced efficacy in patients with UC. In a phase 3 study, obefazimod led to significant remission in patients with moderate-to-severe UC; 47.3% had inadequate responses to prior therapy, highlighting obefazimod's potential. Abivax is awaiting results from a maintenance study, which the biotech company said should come out during the second quarter.

Looking at the risks

The aforementioned successful phase 3 study was over 8 weeks. Its results show that obefazimod works, at least initially. But UC is a chronic disease, and patients often relapse even after getting better initially. Abivax will aim to establish, through the maintenance study, that the medicine's benefits can be sustained. The data from this trial will be critical for Abivax's long-term prospects. If it is positive, the company's shares will likely soar.

Otherwise, the stock might fall off a cliff. Poor maintenance study results will severely limit obefazimod's commercial potential. It could still earn approval, to be clear, but will likely be used primarily as an induction drug to quickly control the medicine's symptoms. What does all this mean for investors? Abivax is a risky stock, especially given that it is a clinical-stage biotech that generates little to no revenue and is consistently unprofitable.

Further, the company's market cap is about 8.15 billion euros ($9.41 billion), which is very high for a drugmaker without a single product on the market. That likely reflects obefazimod's potential, but it also highlights, once again, what will happen if Abivax runs into any clinical or regulatory setbacks. With all that said, should investors buy Abivax's shares right now? It all depends on each person's risk tolerance. Those comfortable with above-average risk should consider initiating a small position in the stock. For others, there are safer biotech or pharmaceutical companies to consider.

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