Investing in 2020 hasn't been easy. We've watched the broad-based S&P 500 lose 34% of its value in under five weeks, then take less than five months to recoup all of its losses (and then some).
However, periods of heightened volatility often provide opportunities for long-term investors to scoop up shares of great businesses on the cheap. Since the March 23 low, investors have taken a particular liking to the technology sector, with cloud computing, cybersecurity, and artificial intelligence stocks rocketing higher.
But there's another group of stocks currently being overlooked by Wall Street that may offer incredible value and upside to patient investors: biotech stocks.
Although the vast majority of biotech stocks are losing money, a handful of these profitable drug developers are valued at levels that make them absolute bargains. I deem the following three to be the top bargains in the entire biotech industry.
Exelixis (NASDAQ:EXEL), a longtime holding in my own portfolio and a company I've pounded the table on for years, is the perfect example of a high-growth and profitable biotech stock that's getting far too little respect on Wall Street.
The Exelixis story primarily revolves around Cabometyx, the company's lead cancer drug, which is approved to treat first-and-second-line renal cell carcinoma (RCC) and advanced hepatocellular carcinoma. In clinical studies, Cabometyx ran circles around Pfizer's previous first-line standard-of-care drug, Sutent, in RCC treatment. Cabometyx is still the only second-line RCC treatment to have generated the clinical trifecta of a statistically significant improvement in objective response rate, progression-free survival, and overall survival.
Based solely on these indications, Cabometyx should be able to top $1 billion in annual sales by next year, but it's nowhere near finished. Exelixis is testing Cabometyx in six dozen clinical studies as a monotherapy or combination therapy. Even a handful of these clinical studies proving successful could be a major win for Cabometyx's demand and Exelixis' pricing power on its lead drug.
It's worth noting that the CheckMate 9ER study, which combined Cabometyx with Bristol Myers Squibb's (NYSE:BMY) Opdivo, met its primary endpoint in first-line RCC and also reduced patient risk of death by 40%. It would appear that this combination therapy may allow Exelixis and Bristol Myers to secure a significant portion of first-line RCC revenue, if approved.
The point is that Exelixis is expected to grow sales by a double-digit rate for the foreseeable future and is valued at a PEG ratio of just 0.7. Anything below 1 is typically viewed as "undervalued." Also, it has a whopping $1.2 billion in cash, with the potential to generate $500 million in free cash flow each year.
How Exelixis is only worth $7.2 billion as of this past weekend is one of Wall Street's greatest mysteries.
The biggest knock against Jazz has always been the company's reliance on its blockbuster narcolepsy drug Xyrem. Approved 18 years ago, Xyrem is on track to account for roughly $1.7 billion of the company's forecasted $2.225 billion to $2.325 billion in full-year sales in 2020. Additionally, Xyrem finds itself in the spotlight every couple of years for the substantive price hikes that Jazz Pharmaceuticals has passed along.
Yet for all of these concerns, Jazz and Xyrem keep delivering. With little in the way of serious competition, Jazz has ridden the coattails of its blockbuster drug to nearly 1,000% share price gains over the trailing 13 years. What's more, a politically divided Congress doesn't appear to be capable of real drug price reform. Investors tend to get jumpy when lawmakers discuss the idea of capping brand-name drug price hikes, but nothing substantive ever comes to fruition.
Beyond its tried-and-true narcolepsy treatment, Jazz is attempting to dazzle Wall Street with five imminent and/or upcoming drug launches. Arguably the most exciting of these is Xywav, a sister drug to Xyrem that contains 92% less sodium per nightly dose than its 2002-approved counterpart. Since Xyrem's sodium levels can cause problems for narcoleptic patients who also have heart issues, Xywav offers clinically proven efficacy with far less heart-associated risk. Xywav should launch sometime this quarter.
Jazz Pharmaceuticals is a company capable of mid- to high-single-digit growth that has well-insulated cash flow and is valued at less than 9 times Wall Street's consensus adjusted earnings for 2021.
A final biotech bargain that investors should consider adding to their portfolios is Massachusetts-based Alexion Pharmaceuticals (NASDAQ:ALXN).
What sets Alexion apart from most other drug developers is the company's focus on ultra-rare diseases. We're talking about certain indications for which prospective patient pools may be measured in the hundreds. While there's a lot of risk that comes with targeting extremely rare indications, the reward can be incredible for treatments that succeed. In many indications, Alexion has little or no competition. Further, insurers are highly unlikely to push back on Alexion's list price since these patients have no other treatment alternatives.
Keeping with the theme here, Alexion has really leaned on one drug to drive its impressive sales growth. This drug, Soliris, is capable of roughly $4 billion in annual sales and has had its label expanded a number of times over the years.
But what's more exciting is Alexion's development of Ultomiris as a Soliris replacement. Ultomiris only needs to be administered once every eight weeks, as opposed to every two weeks with Soliris. This schedule improves patient quality of life. The development of Ultomiris also renders moot concerns about Soliris eventually losing patent exclusivity. As Ultomiris replaces Soliris over time, Alexion will have secured its cash flow for many years to come.
A combination of strong pricing power, internal innovation, and Alexion's addition of orphan therapies via acquisition should allow the company to maintain a low double-digit growth rate for the foreseeable future. That makes its forward price-to-earnings ratio of 9 exceptionally cheap.