Bank of America analyst Jason Zemansky recently downgraded Keros Therapeutics (KROS) from Buy to Neutral, slashing the price target from $32 to $18. This move wasn’t driven by concerns about the company’s pipeline, which Zemansky considers compelling, but rather by a cautious outlook for the near term. The analyst points to a lack of significant catalysts in the immediate future, leading to a prediction of range-bound trading for the stock.
Keros recently completed a strategic review, resulting in the decision to move forward with KER-065 for Duchenne muscular dystrophy and return $375 million to shareholders. While this capital return is positive, the uncertainty surrounding its structure and the delay in updates on KER-065 are contributing factors to the downgrade. The expected timeline for FDA discussions on KER-065 isn’t until the third quarter, further dampening near-term expectations.
Adding to the bearish sentiment is the recent statement from ADAR1 Capital Management, Keros’s largest shareholder. ADAR1 expressed significant dissatisfaction with the board’s election results and deemed the planned capital return insufficient, calling for an additional $100 million return. They also urged the creation of a contingent value right (CVR) to allow shareholders to benefit more directly from a Takeda partnership. This vocal dissent from a major shareholder highlights the existing investor discontent and could continue to pressure the stock price.
Zemansky acknowledges that the board’s strategic options are limited, short of dissolving the company, but suggests that the market may have anticipated a more aggressive response to the current situation. The lack of clarity on the capital return structure and the recent setbacks, including the halting of a drug program and staff reductions, have contributed to a cautious investor outlook. Despite the strong cash position and favorable valuation, many investors may adopt a wait-and-see approach, preferring to observe more substantial progress and reduced risk before reinvesting.
While some might argue the stock has been unfairly penalized, given the inherent challenges of developing drugs targeting the TGF-β pathway, Zemansky believes most investors will remain on the sidelines until more concrete advancements materialize. The recent price action reflects this sentiment, with KROS shares trading down 2.34% at last check. This situation presents a complex picture for investors: a promising pipeline potentially overshadowed by near-term uncertainty and investor sentiment. Only time will tell if this is a temporary setback or a more significant shift in the company’s trajectory.
