2 Biotech Stocks at New Lows. Can They Recover?

It's been a rough year for these two biotechs and their unhappy shareholders. Denali Therapeutics Inc. (NASDAQ: DNLI) stock isn't much older than last year's Christmas presents, but shares have already tumbled 39% from a peak set in February. MiMedx Group, Inc. (NASDAQ: MDXG) also peaked in February, but rumors of impropriety knocked the stock down 75% since then.

There have been years of steady stock gains across the board, and now, distressed companies are one of the few places left to shop for bargains. Let's see if any of these stocks have a path to recovery that might make them worth another look.

Denali Therapeutics Inc.: Down, but still high

This sparkly new biotech stock fell hard following its initial public offering (IPO) last December, then recovered briefly after announcing a new partnership with Takeda. The company hasn't run into any significant trouble recently, but the stock just approached another all-time low. Despite the slide, this start-up still has a $1.4 billion market cap that could fall a lot lower if its new drug candidates aren't as valuable as hoped.

Denali's developing a slate of experimental drugs aimed at targets in the brain that have been implicated in different neurodegenerative diseases that lack effective treatment options, such as Alzheimer's disease and Parkinson's disease. The company thinks its proprietary transport technology will help it get big drugs across the tricky blood-brain barrier -- but that's just a beginning.

The neurodegenerative diseases that Denali aims to treat, such as Alzheimer's, progress very slowly. Coupled with the fact that cognitive benefits are difficult to measure and compare from one person to the next, it's no wonder there's a dearth of drugs to stop the diseases this company wants to treat. Denali intends to use lots of patient data to select trial participants most likely to respond to its drug candidates, but there's no getting around the fact that you have to follow them around for years before you'd know if you have a new drug candidate with any potential.

Denali stock could rise several times over if its drugs work for real people, but it's going to be a long time before we know if there's anything here worth getting excited about. Investigators have begun healthy volunteer studies, but the first human proof-of-concept trials aren't slated to begin until the end of the year, at best.

Denali's operations lost $90 million last year, and running new clinical trials will probably accelerate the losses going forward. The company finished March with a healthy $373 million in cash and short-term investments, which suggests it has another couple of years to show some results before it has to tap investors for more.

If the first trial results aren't terrific, though, investors could lose a bundle. Given the odds of success in this tough field, I'd steer clear of this stock until there's some data to evaluate.

MiMedx Group, Inc.: Restate and regenerate?

This company's stock has tumbled around 77% from a peak reached less than five months ago. That's what telling investors that your latest financial report is unreliable as you march your CEO out the door will do to a stock.

The Board of Directors concluded that it will need to restate five years of financials. If the restatements don't deviate too far from stated results, though, this stock could move up nicely.

Over the past several years, MiMedx Group reported steady sales growth among its placenta-based tissue-regeneration products. The hammering of the stock this year, however, is in response to fears the company may have overcharged the government.

What we do know is that top-line revenue wasn't growing much faster than sales, general, and administrative expenses to begin with. If operations have been relying on dubious practices to earn a modest profit, the company's troubles could go far beyond legal expenses.

On the other hand, MiMedx Group is in a strong financial position with positive cash flows and no significant debt to pay down. The shares have been trading at just 1.1 times this year's sales expectations, which is awfully cheap for a profitable business with steadily rising sales. If the company emerges from ongoing investigations relatively unscathed, intrepid investors will be greatly rewarded.

Just because it could rise doesn't mean you should buy

The odds of Denali scoring enough wins in neurology to justify its sky-high valuation are long, but I think there's a solid chance MiMedx will emerge from ongoing investigations with both feet on the ground. While that will make it a fun stock to watch, it probably isn't right for your portfolio.

Once MiMedx restates five years of earnings, your investment could get wiped out if it turns out the company really can't sell regenerative tissue at a profit. Until we can be certain this isn't the case, I wouldn't put any money here.

10 stocks we like better than MiMedx GroupWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and MiMedx Group wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of June 4, 2018

Cory Renauer 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.