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With the Nasdaq Biotechnology Index up 63% this year, finding biotechs on sale hasn't been easy. You try to catch one, and it floats away in the bubble.
But I think I've found three biotechs the market has discounted enough to be worthy of a buy (or at least to keep an eye on).
Sarepta Pharmaceuticals (NASDAQ: SRPT ) got smacked around by the Food and Drug Administration this month when the agency said the biotech should run a larger clinical trial before asking the FDA to approve its Duchenne muscular dystrophy drug eteplirsen.
While the request delays when Sarepta will be able to start collecting revenue on eteplirsen, the FDA's request doesn't affect the long-term investment thesis. Eteplirsen isn't any less likely to work just because the FDA wants Sarepta to study the drug in more patients before approving it.
Sarepta Pharmaceuticals was a better investment when I called it a bad news buy a couple of weeks ago; shares are up more than 30% since then. But if you're going to hold for years, the difference between buying at the low and buying here won't matter much. There's still plenty of room to run higher once a phase 3 trial reads out in a few years.
Ariad Pharmceuticals (NASDAQ: ARIA ) isn't the clear bad news buy that Sarepta Pharmaceuticals is, but if you're willing to take on risk and pick your right spot, there could be substantial reward.
If you don't know the sad story of Ariad's leukemia drug Iclusig, you can read it here. Bring a tissue.
At this point, it's hard to know what the FDA will ultimately do with Iclusig. If the drug is let back on the market with severe restrictions, the company probably isn't worth its current market cap around $850 million. But if the restrictions are reasonable, it's not hard to see sales of a couple of hundred million, especially since the EU has already said Iclusig can stay on the market there with minor changes to the recommended population that should use the drug.
Ariad is the riskiest of the three, in my opinion, but it might be worth keeping an eye on, especially if it drops a little more as investors get anxious about what the FDA is going to do.
Not on sale but still a bargain
Enanta Pharmaceuticals (NASDAQ: ENTA ) is trading at all-time highs, but with a market cap of less than $500 million, there's plenty of room to go higher.
The company helped develop AbbVie's (NYSE: ABBV ) ABT-450, part of its all-oral hepatitis C cocktail. The cocktail produced cure rates that should allow it to compete with Gilead Sciences, which is developing an all-oral cocktail of its own.
The exact royalty rate hasn't been disclosed beyond "double-digit royalties," but if we assume the royalty is 15%, and a third of the drug combination's price is attributable to ABT-450, then AbbVie would owe Enanta $50 million per year on sales of $1 billion for the drug combination, in addition to potential milestone payments. That's pure profit since Enanta Pharmaeuticals isn't responsible for marketing the drug.
ABT-450 will drive Enanta's value in the short to medium term, but the biotech isn't a one-trick pony. Enanta has another hepatitis C drug that's partnered with AbbVie, another partnered with Novartis, and is working on developing two more hepatitis C compounds and an antibiotic on its own.
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