Roundtable: 3 Stocks Janet Yellen Would Hate

The Fed thinks biotech stocks are overvalued. Here's where they're right.

Jul 20, 2014 at 9:15AM

In the Fed's Monetary Policy Report submitted July 15th, Fed chair Janet Yellen called out social media and biotech stocks as having valuations that appear "substantially stretched" (i.e. overvalued). We asked our top contributors for stocks where they think the Fed is absolutely correct. Below are their thoughts.

George Budwell: I think investors have really lost sight of how much risk is involved in many clinical stage biotechs, pushing many of these companies into the stratosphere market cap-wise. Inovio Pharmaceuticals' (NASDAQ:INO) market cap of $566 million--despite a lack of late-stage candidates and an unproven platform, is a good example of this problem.

Inovio's most advanced clinical product is a DNA-based vaccine dubbed "VGX-3100". According to the company, we are close to hearing the vaccine's mid-stage results as a potential treatment for late stage cervical pre-cancer to early stage pre-cancer.

The problem is that DNA-based vaccines have repeatedly failed to produce immune responses in humans stronger than traditional protein-based vaccines. And Inovio's electroporation methodology doesn't appear to be the key to unlocking this technology's promise--based on the clinical trial results so far. As a result, I have a hard time believing investors have appropriately gauged the amount of risk inherent in Inovio's approach to drug development. 

Todd Campbell: GW Pharma (NASDAQ:GWPH) jumps to mind.

There's no question that GW Pharma has some intriguing therapies in its pipeline and GW Pharma has already proven that its marijuana based drug Sativex is well tolerated.

However, despite winning approval in Europe -- a major MS market -- for Sativex in treating MS spascity, sales have remained elusive, totaling just $13 million in the first quarter.

Investors have looked beyond those results to focus instead on Sativex's potential in treating cancer pain and a form of childhood epilepsy, but investors may be getting too far out over their skis on this one. The cancer pain indication is for use as a second line therapy behind commonly used opioids and the epilepsy patient population being targeted by Epidiolex is tiny.

Since GW Pharma's market cap is north of $1.2 billion and its annualized sales are roughly $50 million, investors are paying a rich 23 times sales to buy shares. At that valuation, GW Pharma will need to execute perfectly if it hopes to justify that price tag.

Brian Orelli: I like what Sangamo Biosciences (NASDAQ:SGMO) is trying to do. The current HIV medications beat back the virus, but can't kill it completely, requiring patients to take drugs for the rest of their lives. Sangamo seeks to create a functional cure modifying cells so they can't be infected by the virus. It doesn't get much more disruptive than that.

If it works.

And that's the rub with Sangamo Biosciences. The technology hasn't proven to work with high enough efficiency yet. Could it? Maybe. Perhaps. Hopefully.

If it does, Sangamo is certainly worth a lot more than its current $850 million market cap. But history has shown that new drug technologies tend to take a long time to work out the kinks. Just look at a chart of Isis Pharmaceuticals trading sideways from 2002 to 2012 as the company tried to get its antisense technology working. While there's certainly potential for a big reward, the risk of failure or a long delay before success makes it hard to see how the reward justifies the current valuation.

A blockbuster opportunity even Janet Yellen would call undervalued.
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Todd Campbell, George Budwell, and Brian Orelli have no position in any stocks mentioned. The Motley Fool recommends Isis Pharmaceuticals. 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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