These 3 Biotech Stocks Are Ridiculously Cheap

These stocks may be outstanding bargains for patient investors.

George Budwell
George Budwell
Feb 1, 2017 at 8:06AM
Health Care

As the merger-and-acquisition frenzy kicks into overdrive, it's becoming harder and harder to find reasonably priced biotech stocks. But there are still some bargains to be had in this highflying space. Here's why Amgen (NASDAQ:AMGN), Gilead Sciences (NASDAQ:GILD), and Jazz Pharmaceuticals (NASDAQ:JAZZ) may be deeply undervalued right now. 

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This old hand may have gotten lost in the shuffle

The roots of the modern biopharmaceutical industry can perhaps be traced directly back to Amgen. After all, Amgen played a key role in ushering in the current golden era of biologics, or drugs made from living organisms -- many of which now form the commercial backbone of numerous biopharmaceutical companies.

When it comes to a stock's valuation, though, it's all about the latest and greatest technological innovations. So, given Amgen's ongoing portfolio churn -- where older medicines such as the top-selling anemia drug Epogen are slowly giving way to new stars like the multiple myeloma medicine Kyprolis -- it's not entirely surprising that this biotech pioneer has been unable to garner a top-flight premium lately. More to the point: Amgen is currently trading at a forward price-to-earnings ratio of around 12, whereas the median value within its peer group is almost double that figure.

Complicating matters further, Amgen's foray into the latest cutting-edge biopharma has so far produced mixed results. The biotech's novel cholesterol drug Repatha, for instance, has generated fairly weak sales since its launch, in large part because of push-back from payers. The underlying reason is that the jury is still out on whether lowering bad cholesterol levels is indeed an effective way to improve cardiovascular outcomes, and this fuzzy picture won't clear up until Repatha's FOURIER trial reports top-line results later this quarter

Despite the market's lack of enthusiasm, however, Amgen's underlying business remains in excellent shape. Last year, for example, the company delivered particularly strong financial results and doled out an above-average dividend for a major drug manufacturer. So with 2017 on track to produce more of the same from a financial standpoint, this forgotten biotech is arguably an absolute bargain right now. 

Gilead isn't a ticking time bomb

Gilead has the distinguished honor of being the "cheapest" large-cap biotech stock by a wide margin. The lowdown is that the Street has grown increasingly nervous about the sustainability of the biotech's hep C franchise because of a rapidly evolving marketplace that's far more competitive and less attractive from a pricing standpoint than it was just two years ago.

Some analysts, after all, are projecting Gilead's hep C sales to drop by more than 50% by 2020, relative to 2016 levels. If that happens, then the company's rock-bottom forward price-to-earnings ratio of 6.5 may be a wholly misleading indicator about the biotech's true long-term valuation.

Another major question mark is the ability of Gilead's pipeline -- as currently constructed -- to produce a product capable of offsetting its fading hep C revenue stream. To do so, the biotech is mostly banking on its clinical assets in the unproven area of nonalcoholic steatohepatitis -- a market that is largely untapped but also faces serious problems revolving around identifying actual patients -- and in inflammatory diseases such as rheumatoid arthritis that already have a surfeit of approved treatments and several more in clinical trials. In other words, Gilead's pipeline currently lacks an obvious game-changer.

Although the market's healthy skepticism toward Gilead is arguably warranted at this stage, this trend-setting biotech isn't necessarily a dreaded "value trap." The bottom line is that Gilead has more than enough cash -- and free cash flow -- to buy its way out of trouble. And eventually, management will pull the trigger on a series of value-creating deals or a single large acquisition to turn the tide. Until then, investors may want to take advantage of these bargain-basement prices. 

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Jazz's overreliance on Xyrem isn't a reason to worry just yet

Jazz's modest forward price-to-earnings ratio of 10.7 is the direct result of its heavy reliance on the narcolepsy drug Xyrem to drive growth. Given that 73% of the drugmaker's revenue comes from this single drug, and the bulk of Xyrem's sales growth has stemmed from controversial price increases over the years, investors have understandably shied away from this specialty biopharma lately. To make matters worse, the FDA recently approved a generic version of the drug, although Jazz's pending patent-infringement lawsuit should be enough to block its entry into the market for a while.  

Jazz's $1.5 billion acquisition of Celator last year, however, is a reassuring sign that the company has a solid plan in place to deal with its dependence on Xyrem. The short story is that the Celator deal brought in the acute myeloid leukemia (AML) drug candidate Vyxeos, which could eventually achieve peak sales in excess of $400 million. Besides being a major stepping stone toward revenue diversification, though, this deal should go a long way toward bulking up the company's oncology portfolio, which presently includes the acute lymphoblastic leukemia drug Erwinase.

Now, the reason Jazz's growing oncology footprint is worth watching is that cancer drugs typically garner sky-high pricing points with little resistance from payers -- especially when they fill an unmet medical need, as Vyxeos appears set to do in AML. 

So, given that Jazz is working diligently toward broadening its product portfolio, and the generic threat to Xyrem is minimal at this point, this specialty pharma stock appears to be grossly undervalued when compared to most of its biopharma peers.