Dollar Signs In A Drug Packet

Image source: Getty Images.

The S&P 500 is currently trading near its all-time high, but that doesn't mean there aren't bargains on the market today. That's especially true when you consider that biotech stocks have been absolutely mauled over the last 12 months.

Take a glance at the last year's returns of the iShares Nasdaq Biotechnology Index ETF to see just how much investors hate this sector right now. 

IBB Chart

IBB data by YCharts.

When a huge group of stocks are sold off en masse like that, it usually means there are a plethora of high-quality companies within the bunch that can be purchased for attractive prices. I believe the sector is offering up plenty of bargains, so I recently stepped up to the plate and bought shares of four fast-growing biotechs for what I think are cheap prices.

Read on to see which stocks which I decided to buy and my rationale for making each purchase.

1. Alexion Pharmaceuticals

My first purchase was Alexion Pharmaceuticals (NASDAQ:ALXN), a highly profitable and fast-growing biotech that has been a market darling for years. The company's success can be primarily attributed to Soliris, its enzyme replacement therapy that treats two extremely rare conditions: paroxysmal nocturnal hemoglobinuria (PNH) and atypical hemolytic uremic syndrome (aHUS).

Alexion is a bit of a controversial stock to own because Soliris is an extremely expensive drug. Annual treatment costs often run above $500,000 per patient per year, and with politicians taking aim against the sky-high cost of drugs, it's possible that Alexion will come under pressure to lower its prices. 

That's a real risk, so why on earth did I recently buy shares? Here's my logic:

Alexion Strensiq

Image source: Alexion Pharmaceuticals.

First, I think that Alexion's orphan-disease focus will help to preserve its pricing power, even in the face of healthcare reform. After all, there are only a few thousand cases of PNH and aHUS worldwide, so while the drug is expensive, it's not directly hitting millions of consumers' wallets. There's also a strong argument to keeping prices for these small-indication drugs high in order to incentive researching treatments at all.

Second, Alexion is in the process of rolling out two new products -- Kanuma and Strensiq -- that together hold blockbuster potential. These two drugs should produce roughly $190 million in revenue this year, which is a decent start for newly launched drugs; they should help to diversify the company's revenue.

Third, the company has a pipeline full of new drug candidates and label expansion opportunities.

Finally, Alexion's shares have been hit hard over the past year -- down more than 39% over that time period. For me, that more than compensates for the risk I am taking by buying now.

All told, analysts believe that Alexion is still firmly in growth mode, as the company is expected to grow its bottom line by more than 20% over the next five years. That's quite a feat for any company, let alone one that is only fetching about 19 times forward earnings.

2. Celgene

I've been a huge fan of Celgene (NASDAQ:CELG) for quite some time. Celgene's multiple myeloma treatment Revlimid has already reached megablockbuster status, and it's still growing by double digits annually. Better yet, the company has protected it from generic competition until 2022, which should give investors peace of mind. 

Screen Shot

Image source: Celgene.

Beyond Revlimid, Celgene also has several other products on pharmacy shelves that are growing fast. These include the company's oral anti-inflammatory drug Otezla, which should hit blockbuster status soon. Its other multiple myeloma drug, Pomalyst, is also selling like hotcakes and is expected to juice the company's top and bottom lines for years to come.

Like any good biotech, Celgene also boasts an amazingly strong pipeline. The crown jewel is a drug called ozanimod, which Celgene got its hands on in last year's $7.2 billion purchase of Receptos. Peak sales estimates are running as high as $4 billion annually, so that will be money well spent if ozanimod can live up to its potential.

Celgene's future is looking so bright that management has stuck its neck out and forecast more than $21 billion in total sales and more than $13 in earnings per share by 2020. This implies a 18% and 23% compound annual growth rate, respectively, from today's levels.

And yet, despite all that goodness, shares are currently trading hands for about 15 times next year's earnings. I believe that's far too cheap, so I'm happy to bet that this company's stock will continue to be a market-beater from here.

3. Gilead Sciences

Of all the beaten-down stocks on this list, Gilead Sciences (NASDAQ:GILD) is by far the one that worries investors most right now. Many believe that the company's glory days are a thing of the past, and that it's all downhill from here.

Shares are currently trading hands for about seven times trailing earnings -- yes, seven times -- which implies that the company won't be able to grow again.

So why all the doom and gloom?

The company's hugely profitable hepatitis C franchise has come under attack from competitors like AbbVie and Merck. That has forced Gilead to give in on pricing in order to maintain its market share. Since its two hep-C treatments -- Harvoni and Sovaldi -- account for more than 50% of the company's total revenue, giving in on pricing is expected to cause the top line to stagnate.

Gilead

Image source: Gilead Sciences.

I'm not blind to this worry, but I think the market is currently pricing in all of the bad news and none of the good.

So what's the good news? For one, Gilead's newest hepatitis C drug Epclusa was recently approved for every type of hep C patient. This will help the company to target even more patients with hep C in the U.S., further extending its lead in this indication. The company's other cash-cow business -- HIV/AIDS treatments -- is also thriving, with drugs like Truvada, Stribild, and Complera still growing, even as the company adds new medicines. Add this to the company's massive buyback program, impressive pipeline, and fast-growing dividend, and I think there are reasons to remain bullish.

4. Vertex Pharmaceuticals

Rounding out our list today is Vertex Pharmaceuticals (NASDAQ:VRTX), a biotechnology company that currently dominates the cystic fibrosis, or CF, market.

Vertex currently has two CF treatments on the market: Kalydeco and Orkambi. Kalydeco has been on the market for a few years now, and it's been a real winner for the company. Sales are expected to grow yet again to more than $685 million this year, which is mostly being driven by label-expansion claims.

Kalydeco has been a good drug for Vertex, but Orkambi is far more exciting. That's because Orkambi was approved with a much wider labeling claim than Kalydeco was, so more patients with CF can take it right out of the gate. Orkambi sales hit $220 million in its second quarter, which overtook Kalydeco, and are expected to breach the billion-dollar mark this year. That number is quite impressive, and it doesn't even include revenue from Europe or Canada yet, although the drug already has regulatory clearance in both regions (reimbursement is pending).

Screen Shot

Image source: Vertex Pharmaceuticals.

Like all of the biotechs listed here, Vertex also has an exciting pipeline. Its next-generation CF treatment, VX-661, is currently in phase 3 trials. This drug holds promise to once again expand the company's addressable market, which should keep Vertex one step ahead of potential competitors.

Analysts believe that Vertex will be the fastest-growing biotech of this whole group. Earnings are projected to grow more than 58% annually over the next five years, which is unbelievably fast. Compare that number to the company's forward P/E of only 28, and this company sports the most attractive price/earnings-to-growth ratio of the bunch. A forward P/E of 28 might not sound cheap, but if the company can execute on its growth plans, I believe that it is.

And one more thing...

I actually decided to buy five biotech stocks last week, but I couldn't fit them all into this single article. 

Curious to hear what other biotech stock I recently purchased? You can read all about it here.

Brian Feroldi owns shares of Alexion Pharmaceuticals, Celgene, Gilead Sciences, and Vertex Pharmaceuticals, but that was obvious, right? Like this article? Follow him on Twitter where he goes by the handle @Longtermmindset or connect with him on LinkedIn to see more articles like this.

The Motley Fool owns shares of and recommends Celgene and Gilead Sciences. The Motley Fool has the following options: short October 2016 $95 puts on Celgene. The Motley Fool recommends Vertex Pharmaceuticals.

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