2 Health Care Stocks to Watch: Enanta Pharmaceuticals, Inc. and PDLI BioPharma, Inc.

PDL BioPharma and Enanta Pharmaceuticals are "cheap" when viewed from a forward price-to-earnings ratio standpoint.

May 2, 2014 at 6:22PM

Bargain hunters have largely stayed away from health-care stocks over the last year and for good reason. Specifically, this group of stocks has generally soared to record high price-to-earnings ratios ever since 2012, making them some of the most expensive from a fundamental perspective. Yet the recent pullback in the sector may have finally created some intriguing value or growth plays that you may want to check out. With that in mind, here is a closer look at two health-care companies that look comparatively "cheap" based on their respective forward P/E ratios: Enanta Pharmaceuticals (NASDAQ:ENTA)and PDLI BioPharma (NASDAQ:PDLI)

Enanta is the forgotten hepatitis C stock
With heavyweights like Gilead Sciences and Johnson & Johnson launching the first wave of next-generation hepatitis C drugs recently and several other big names releasing promising clinical data for their own therapies as well, Enanta Pharmaceuticals has gotten lost in the shuffle to some degree. And perhaps part of the problem is that Enanta has partnered with AbbVie (NYSE:ABBV) for its all-oral hepatitis C therapy, which has tended to grab most of the headlines regarding the drug's clinical and regulatory progress. I believe, though, that there are several good reasons to dig deeper into Enanta, especially since it might reap the biggest rewards in terms of share-price appreciation out of the current crop of hepatitis C players. 

What's key to understand is that Enanta is expected to become cash flow positive if its therapy is approved later this year. Its earnings per share are projected to grow by over 350% next year, and its forward P/E ratio currently stands at a mere 5.3 based on expectations for a fiscal year ending September 30th, 2015. I am particularly optimistic that these projections aren't far off base now that Gilead and J&J's new hepatitis C drugs both posted stellar sales numbers in their first full quarter on the market. Enanta thus looks like it could still have significant upside potential despite rising over 30% year to date.

PDLI BioPharma is the forgotten dividend stock in health care 
When investors think health care, I suspect they tend to think of growth, not dividends. Indeed, health care stocks aren't generally known for being the best dividend plays since most of these companies choose to reinvest their free cash in research and development. PDLI BioPharma is a clear exception to this trend because it earns revenue primarily from licensing out its patent portfolio and returns a fair amount of its free cash in the form of a dividend that presently exceeds 7% a year. 

Despite this handsome dividend, PDLI's shares are well off their 52-week highs and the stock is trading at a forward P/E ratio of only 4.2. Even though earnings are expected to grow by over 8% next year, investor interest in PDLI shares appears lukewarm, to put it mildly, judging by the low daily volume and high short interest. However, I think there are good reasons to believe PDLI is a bargain at current levels. Chief among them, PDLI has secured its financial future by settling with Roche over its core patents and executed 10 new financing deals with a diversity of biotechs over the last few months. My view is that PDLI fell off investors' radars because they assumed the company would close its doors at the end of 2014. Now that PDLI has decided to continue operations for the foreseeable future and cut deals to increase revenue as well, it's well worth checking out.

Foolish wrap-up
Although the health care sector has been undergoing a fair amount of turmoil in recent weeks, you shouldn't forget that companies with growing revenue tend to perform well over the long term. Enanta and PDLI are currently two of the cheapest and most underloved health care stocks in the sector right now. Even so, these companies offer investors some intriguing levels of growth in terms of earnings going forward. As such, you may want to dig deeper into these potential value/growth stocks. 

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George Budwell owns shares of Gilead Sciences. The Motley Fool recommends Gilead Sciences. It recommends and owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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