Over the past several months, investing in biotech has felt like catching a falling knife. At the sector level, the departure of key personnel at FDA and the uncertainty surrounding the agency’s direction under RFK’s leadership have undermined investor confidence in the regulator. On a broader scale, U.S. tariffs have destabilized global markets, impacting investor confidence in the overall markets. Investors who entered the biotech market, believing a bottom had been reached or was at least near, bear the scars of their courage. While we fully recognize that more downside may exist, if we were to boldly dive into the biotech market today, here are a few names that would rank high on our list.
Big Binary Bet
Xenon Pharmaceuticals (Nasdaq: XENE) has navigated the biotech storm better than many, but recently, it stumbled under the weight of market negativity, falling below the $30 mark for the first time since 2023, before making a modest recovery. Despite this recent decline, the company still boasts a healthy $2.6 billion market cap and a $1.8 billion enterprise value. Amid the broader biotech turmoil and the plethora of companies trading at or below cash, there are undoubtedly more affordable names than Xenon. However, Xenon possesses something that biotech investors still covet: an enormously significant Phase 3 readout later this year that, if successful, should pave the way for a commercially successful drug and potentially a monster franchise. Conversely, a lack of clinical success could cast a shadow over the company’s entire clinical pipeline. These binary bets are not for the faint-hearted, but Xenon’s valuation reflects investors’ belief that the odds of this data coin flip are weighted toward success. We tend to concur that Xenon’s upcoming Phase 3 data are weighted toward success, making this recent decline a potentially attractive entry point for those who embrace high-stakes clinical readouts.
Weighted Coin
Xenon’s ability to maintain a healthy valuation amid the biotech storm reflects the strong confidence that investors have in the company’s lead asset, azetukalner (XEN1101), and the likelihood of success for its upcoming Phase 3 readout (dubbed X-TOLE2) for focal epilepsy. Investors have solid reasons to believe that the focal epilepsy data is skewed in favor of azetukalner’s success. We have extensively covered Xenon since 2019 ($8.35) and have previously highlighted the attributes of azetukalner and the robustness of the company’s Phase 2b X-TOLE data. However, as a brief reminder, azetukalner is a second-generation Kv7 opener built on the same scaffold as the first-generation Kv7 opener, ezogabine. Ezogabine was an effective anti-seizure medication that received FDA approval for focal epilepsy but faced safety concerns (bladder and pigmentation issues) that hindered its commercial success and led to its eventual removal from the market. Azetukalner was developed to address the commercial challenges of ezogabine, boasting significantly improved safety, efficacy, and convenience. For those interested in the background of Kv7 and azetukalner, we suggest reading our 2019 note, which details how Xenon unearthed the asset and opportunity.
In 2021, Xenon completed the 325-patient Phase 2b X-TOLE study, in which azetukalner demonstrated robust, statistically significant, dose-dependent seizure reduction data in patients with focal epilepsy. The X-TOLE study includes an ongoing open-label extension (OLE) that has shown continued robust seizure reduction for up to three years with azetukalner treatment. Azetukalner’s tolerability from the X-TOLE study and the OLE has been favorable, with no signs of safety liabilities associated with the first-generation Kv7 product.
The strength of X-TOLE data and the proven anti-seizure benefits of targeting Kv7 are the two most significant factors influencing investor confidence in the success of azetukalner in X-TOLE2 .
First Step Towards A Franchise?
Although Xenon plans to advance one or two new assets into the clinic this year, it remains, at this stage, a single-asset company. Azetukalner may currently be Xenon’s only clinical asset, but the company argues that it represents a “pipeline in a drug,” with studies ongoing or planned for various other CNS indications beyond focal epilepsy. A Phase 3 study is currently underway for primary generalized tonic-clonic seizures (PGTCS), and the first of three Phase 3 studies in major depressive disorder (MDD) has also been initiated. Additionally, the company plans to launch a new Phase 3 program in bipolar depression (BPD) later this year.
This “pipeline in a drug” approach amplifies the significance of the company’s initial Phase 3 readout in focal epilepsy. Although the focal epilepsy results may not be directly tied to the likelihood of success in the neuropsychiatric indications (MDD and BPD), investors are likely to perceive them similarly. If X-TOLE2 fails, it will raise doubts about the company’s entire azetukalner-based pipeline. Conversely, clinical success in X-TOLE2 will not only bolster investors’ confidence in the likelihood of FDA approval (expected in 2026) and the commercial potential of azetukalner for focal epilepsy, but it will also enhance their belief in azetukalner’s chances for success in other indications and its potential to develop into a leading CNS franchise.
Data-rich
While most development-stage biotechs experience a news drought following Phase 3 success as they navigate FDA approval process, Xenon will effectively capture investor attention with anticipated Phase 3 readouts from MDD and PGTCS in 2026, alongside its pursuit of FDA approval for focal epilepsy. Additional Phase 3 readouts in MDD and BPD (with two planned) are expected in the coming years. Xenon is poised to be a data- and regulatory-rich story for the foreseeable future.
Betting On Success
We have previously discussed binary clinical events that offer potential asymmetrical returns. While we believe Xenon presents an opportunity for an asymmetric return from its focal epilepsy readout, it is not the near-term reward that appeals most to us. We view focal epilepsy as a foundational component of a CNS franchise—one that could expand to four or more indications. Nevertheless, the first and most important step towards establishing that franchise starts with achieving success in focal epilepsy later this year. For those who can stomach the risk/reward of a big binary data readout, an entry point in the low $30s may be attractive.
Speaking Of Franchises
Delcath Systems (Nasdaq: DCTH) offers investors the comfort of a growing commercial business in a strong financial position with blue-sky platform potential. By all accounts, Delcath met or exceeded expectations with its 2024 U.S. launch of the Hepzato Kit for treating metastatic uveal melanoma (mUM). With a successful launch behind it and a healthy treasury, the company is now reinvesting in R&D to unlock Hepzato’s platform potential. The company plans to initiate two clinical trials in new liver-dominant cancer indications this year. There’s also near-term clinical intrigue from an investigator-sponsored study exploring the combination/sequencing of Hepzato with systemic therapy, which, if successful, could accelerate Hepzato’s adoption in mUM and potentially other liver-dominant tumors. Delcath has begun to establish Hepzato as the liver-directed therapy (LDT) of choice for mUM and, with its investment in R&D and forthcoming combination data, is positioning Hepzato as an LDT franchise well beyond mUM.
Strong Financial Foundation
Delcath performed exceptionally well with the Hepzato launch. The company reported $32.3 million in its first year of U.S. sales and concluded the year with an impressive annualized run rate of approximately $55 million. Chemosat, the medical device version of Hepzato sold in Europe, also had an encouraging 2024 with roughly $5 million in sales. In 4Q2024, Delcath was EBITDA positive and had a modest cash burn of $1 million. Delcath’s CEO, Gerard Michel, stated that the company is expected to achieve positive cash flow in FY2025. In 2024, the company eliminated all outstanding debt obligations and finished the year with a strong treasury balance of $53 million.
Delcath anticipates nearly doubling the number of U.S. centers using Hepzato this year, increasing from 16 at the start of 2025 to 30 by the year’s end. The company is expanding its commercial organization to support its growth plans and expects to have all new commercial personnel in place by mid-2025. Consequently, the company’s impressive growth rate should accelerate in 2H2025. Given the current utilization rate of slightly under two Hepzato procedures per month per center, Delcath should exit 2025 with an annualized revenue run rate of $120 million or more.
Clinical Blue-Sky
Delcath’s commercial goal is to establish Hepzato as the gold-standard LDT for mUM. Early evidence suggests that the company is on its way to achieving this objective. A secondary and more challenging goal is to advance Hepazato either ahead of or in combination, sometimes called sequencing, with systemic therapy. Some centers are already implementing this approach. The company states in its corporate presentation, “Currently, a growing minority of Oncologists/MDs believe LDT as a 1st line is critical.”
Several clinical studies, either ongoing or scheduled to commence soon, are exploring various sequencing methods for Hepzato/Chemosat and systemic therapy. The most notable and imminent is the CHOPIN study from the Netherlands, a randomized controlled trial involving 76 mUM patients that compares a sequencing regimen of Chemosat (referred to as M-PHP in the schematic below) with immunotherapy (ipi/nivo) versus Chemosat alone.
Before starting randomization, CHOPIN included a seven-patient Phase 1b segment to ensure the safety of the sequencing regimen. In this part of the study, the combination of Chemosat with ipi/nivo achieved an impressive median progression-free survival (PFS) of 29.1 months. Although based on a small sample size, these PFS results surpass LDT alone (Hepzato 9 months) and approved systemic therapies (ipi/nivo 3 months, Kimmtrak 3.4 months). Suppose the randomized portion of the study shows a PFS even close to that observed in Phase 1b. In that case, these data should encourage physicians who prefer systemic therapy as the first line for treating mUM to incorporate Hepzato into their initial regimen. It could also stimulate increased off-label experimentation with Hepzato immunotherapy combinations in other challenging liver-dominant cancers. Top-line data from CHOPIN are expected to be presented at the European Society of Medical Oncology (ESMO 2025) in October.
There’s also an ongoing 40-patient randomized controlled study in Sweden comparing first-line Chemosat followed by systemic immunotherapy (ipi/nivo) to immunotherapy alone. However, the top-line PFS data from this study will not be available for a few years. Additionally, Dr. Jonathan Zager from Moffitt Cancer Center tweeted about an upcoming study investigating the combination of Hepzato with Immunocore Holdings’ (Nasdaq: IMCR) tebentafusp (Kimmtrak).
Platform Blue-Sky
Delcath is set to embark on a platform-validating clinical program, with studies planned to begin this year in liver-dominant metastatic breast cancer and liver-dominant metastatic colorectal cancer. Although data from these studies is not expected for a few years, they represent a significant opportunity to expand Hepzato’s addressable market to over $1 billion annually. In the meantime, Europe should continue to generate a regular cadence of case reports and small investigator-led study publications on Chemosat’s use in mUM and other live-dominant tumor types. As CEO Michel stated on the FY2024 call, “The strategic value of our European presence lies in supporting clinical trials and generating publications. In 2024, over 10 studies from European centers were published, including research on Chemosat’s use in intrahepatic cholangiocarcinoma.”
Foundation Already In Place
Unlike Xenon, which needs clinical success to establish the foundation for a potential CNS franchise, Delcath already has its foundational piece to build its LDT franchise. The company can grow and be profitable based on Hepzato for mUM alone. Starting this year with CHOPIN, investors could begin to see the additional components of the foundation for an LDT franchise established. More sequencing data and results from other liver-dominant tumor trials could eventually expand Hepzato’s addressable market to over $1 billion in subsequent years. Considering the established Hepzato foundation and the blue-sky platform potential, Delcath appears to be very affordable.
Still We Wait
We await FDA’s qualification decision regarding bone mineral density (BMD) as a surrogate endpoint for future osteoporosis drug approvals. The delay has now stretched to three months, and as far as we know, there is no updated timeline for a decision. Although determining the exact reason for the delay is impossible, turnover at FDA has likely contributed to it. In our conversation with the CEO of Entera Bio (Nasdaq: ENTX), an industry sponsor of SABRE, the mood among key stakeholders in the BMD process remains positive. As outlined in several earlier notes, Entera is the most leveraged public company to FDA’s BMD qualification decision. The lack of visibility is frustrating, but we remain confident that BMD will eventually be qualified.