2 Beaten-Down Stocks to Avoid

Over the past year, Editas Medicine (NASDAQ: EDIT) and Sarepta Therapeutics (NASDAQ: SRPT), two biotech companies, have encountered severe headwinds that aren't at all related to broader market volatility. Both drugmakers have seen their shares plummet over the trailing-12-month period. However, while investors are supposed to buy low, even at current levels, Editas Medicine and Sarepta aren't attractive stocks to buy.

Let's consider why investors should stay a safe distance away from these two biotech companies.

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1. Editas Medicine

Editas Medicine is a leader in the field of gene editing. It doesn't have any product on the market, and none of its candidates are even in phase 3 studies. Any company that matches this description is likely to carry above-average risk, but Editas Medicine is even riskier than some comparable peers, despite teaming up with a pharmaceutical giant, Bristol Myers Squibb, for the development of one of its potential therapies.

Not too long ago, Editas Medicine was working on Reni-Cel, an investigational treatment for two rare blood disorders. Although the data from clinical trials for this medicine was promising, Editas Medicine had to abandon it because it did not find a cash-rich partner to help foot the bill.

That wasn't the first time biotech encountered this issue. One of Editas Medicine's previous leading candidates was EDIT-101, an investigational treatment for a group of rare eye diseases called Leber congenital amaurosis. Here, too, the data from clinical trials looked somewhat promising. Here, too, the commercial opportunity did not justify a company as small as Editas Medicine going at it alone, but it couldn't find a partner to help fund the development of EDIT-101, so it abandoned the project.

Some might argue that things might turn out differently this time, especially thanks to Editas Medicine's partnership with Bristol Myers. They might turn out differently, but there is little reason to think they will. Given the risk involved in investing in biotech companies that only have active programs in early stage studies -- and the company's rather recent track record of failures -- it's hard to make a case for investing in the stock that looks remotely convincing. Investors should steer clear of Editas Medicine.

2. Sarepta Therapeutics

Sarepta Therapeutics is an innovative biotech. It developed several medicines for a rare, difficult-to-treat, progressive muscle-wasting condition called Duchenne muscular dystrophy (DMD). The most important treatment in the company's arsenal is Elevidys, a gene therapy for DMD that targets the underlying causes of the disease. At least, Elevidys was Sarepta's crown jewel, but recent developments have changed that status. In March, Sarepta announced that a patient taking Elevidys had died from acute liver failure (ALF).

Clinical trials had revealed that liver problems were a potential side effect of the medicine, but no patient had died from it. In fairness, this particular individual also had a cytomegalovirus infection not long before passing. CMV infections can cause liver issues. It wasn't clear whether Elevidys was responsible for the death, but, as one would expect, the company's shares fell off a cliff anyway.

Things recently went from bad to worse for Sarepta Therapeutics. On June 15, the company announced that a second patient on Elevidys had died from ALF, sending the stock to brand new lows. The biotech is looking for ways to mitigate the risk of this potentially deadly side effect for patients on Elevidys. It has also paused a clinical trial for the medicine and halted shipments of the treatment to patients most at risk.

These are all good steps, but it's unclear whether the company can recover from this devastating turn of events. Investors should stay a safe distance away from the stock.

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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bristol Myers Squibb. The Motley Fool recommends Editas Medicine. The Motley Fool has a disclosure policy.