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Investing in beaten-up biotech stocks is usually a difficult proposition. Drug companies typically plummet after bad news -- a failed clinical trial or a Food and Drug Administration rejection, for instance -- making it hard for them to come back, especially since raising additional capital at the beaten-down price can cause substantial dilution of shareholders.

But with the biotech industry still well off its highs last year, it's a little easier to find companies with plenty of cash that have been knocked down -- just make sure you don't fall into a value trap during your hunt.

1. A big biotech looking for growth

Gilead Sciences (NASDAQ:GILD) is down about 23% this year after its hepatitis C drugs, which make up more than half of its sales, saw a year-over-year decline of 5.6% in the first quarter followed by a 19% decline in the second quarter. Competition from Merck and AbbVie has forced Gilead to discount its drugs to get insurers and pharmacy benefit managers to cover them. An increase in sales for patients covered by government programs, which receive discounts, has also lowered the average price.

In addition to the pricing issue, hepatitis C drugs are cures for a vast majority of patients, so there's no base to build sales off of. Each quarter, Gilead has to convince doctors to prescribe the drug for new patients to make up for the ones that completed their regimen.

While hepatitis C sales have dropped, Gilead's HIV medications are still growing thanks to the launch of a new component of its cocktails called TAF. In the first half of the year, sales HIV and other antiviral drugs were up 15%, mitigating much of the decline in hepatitis C drug sales.

Gilead has some promising drugs in its pipeline, but nothing that's going to move the $30 billion needle all that much. To turn things around and accelerate growth, Gilead needs to buy some growth. Fortunately the biotech has the means with over $24 billion in the bank at the end of the second quarter. Management has said they don't want to overpay just to get a deal done, so investors could be waiting awhile.

In the short term, Gilead could be a value trap based on investor sentiment; there's arguably little to be excited about until a deal is done. But long-term investors could be handsomely rewarded for buying at depressed prices, and they'll get paid a dividend while they wait.

2. Overcoming expectations

Regeneron Pharmaceuticals (NASDAQ:REGN) is down about 27% this year as the biotech's newest drug has failed to live up to expectations, combined with an overall bear market for biotechs. Even with the drop, Regeneron still sports a P/E around 60.

Sales of Eylea, Regeneron's drug for macular degeneration and two other eye diseases, remain strong with U.S. sales increasing 27% year over year in the second quarter. Regeneron's portion of sales outside the U.S. by partner Bayer increased 56% year over year.

On the downside, sales of its newest drug Praluent, which is sold by partner Sanofi (NASDAQ:SNY), came in at just $24 million in the second quarter, having been on the market in the U.S. for almost a year. Approval of a monthly dosing regimen of the cholesterol-lowering drug next year could help, but blockbuster sales probably won't come until Sanofi and Regeneron can prove Praluent provides a cardiovascular benefit in the ongoing ODYSSEY OUTCOMES clinical trial.

The fastest way to overcome disappointing sales of Praluent is for Regeneron to get a third -- and more -- drugs approved. Fortunately its next drug, dupilumab (which is also partnered with Sanofi), is already under review by the FDA to treat atopic dermatitis, and Regeneron has 13 other drug candidates behind dupilumab.

Regeneron still looks overpriced based on its current sales and earnings, but if the pipeline pays off, investors are likely getting a deal at these knocked-down prices.

3. A side effect to overcome

Like most biotechs, Ionis Pharmaceuticals (NASDAQ:IONS) had a rocky start to the year as investors reset their risk-reward expectations. But Ionis' shares got hit even harder in May when it disclosed that some patients being treated with two of its drug candidates experienced extremely low platelet levels, leading to concerns there could be a problem with the company's entire platform. Ionis moved quickly to increase monitoring of patients, which appears to have alleviated the problem, but shares are still trading about 16% lower than they were before the disclosure.

While monitoring could catch the problem before it becomes life threatening, the added test burden might make it hard for Ionis' drugs to compete with other drugs that don't have that requirement. For at least one of the drugs, volanesorsen, the extra test for platelet levels might not be a problem since the drug treats patients with familial chylomicronemia syndrome who appear to be at increased risk for low platelet levels and should probably be tested anyway. The other drug, IONIS-TTRRx for TTR familial amyloid polyneuropathy, might have a tougher time competing against Alnylam Pharmaceuticals, which is also developing a drug for the disease. We'll have to wait for the phase 3 efficacy and safety data from both companies to know how much the increased testing could be a problem.

Ionis believes the side effect may only be present when its antisense drugs are given at high doses, so the platelet issue isn't a problem for drugs given at a lower dose, such as nusinersen, which recently passed a phase 3 trial in babies with spinal muscular atrophy. And Ionis has more potent Generation 2.5 and Ligand-Conjugated Antisense (LICA) technologies, so earlier stage pipeline drugs can be dosed at lower doses that shouldn't cause low platelet levels.

Like Regeneron, Ionis pharmaceuticals looks expensive even at this knocked-down price based on its currently approved drug. Even adding in expectations for nusinersen, the biotech needs hits from the rest of its pipeline to justify its valuation. Fortunately, both volanesorsen and IONIS-TTRRx are scheduled to read out phase 3 data next year, so investors won't have wait long to see if the sale price is worth it.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.