3 Undervalued Biotechs Worth Adding to Your Watch List

If you're like me, your investment watch list is overflowing with dozens of stocks and price alerts. I love getting a good deal, especially for equities with high growth potential, like biotech companies. There's just one problem: Bargains in that industry are quite rare. 

In fact, valuations in the biotech space skew high. The average trailing price-to-earnings (P/E) ratio rests at 480, and the average price-to-sales (P/S) multiple is just above 8. So, a stock with lower ratios than those could be viewed as a bargain -- assuming that there isn't a major issue depressing its price. Let's examine three biotechs trading at lower than average valuations and consider whether they might be worth putting on your watch list.

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1. Supernus Pharmaceuticals

Supernus Pharmaceuticals (SUPN 1.00%) makes drugs that treat disorders of the central nervous system, including epilepsy and Parkinson's disease. With five approved drugs on the market, it's comfortably profitable, and its quarterly revenue is growing at 51.9% year over year. The company's earnings are also expanding rapidly. It posted 38.6% year-over-year growth in the most recently reported quarter, which ended in September.

So why are its trailing P/E and P/S multiples lower than the industry's averages?

There's no single answer to that question, but it probably has something to do with the company's numerous issues in 2019. Net product sales fell by 4.1% over the year, as did its stock price. Perhaps more importantly, 2019 was the year when its phase 3 clinical trial for impulsive aggression in children with attention deficit hyperactivity disorder (ADHD) failed to meet its clinical endpoints. That led to the company stopping development of the drug for that indication, and it also did some damage to its stock price. Moving forward, Supernus isn't facing any trouble with sales growth, nor has it reported negative clinical trial results. While there's no guarantee that its upcoming clinical milestones will be met, the company is more than ripe for a turnaround given its roster of approved drugs and new projects in the making.

2. Ironwood Pharmaceuticals

Ironwood Pharmaceuticals (IRWD -1.62%) has one product on the market -- Linzess, which treats irritable bowel syndrome (IBS). Right now, researching what other conditions that drug might successfully treat is the company's primary focus. At present, Linzess is the leading treatment for IBS, with a market share of nearly 40%. That's more than enough to keep Ironwood profitable in the near term, but management isn't predicting rapid revenue growth anytime soon. 

Ironwood is trading at a low multiple for a few reasons. The first is that its quarterly revenue and earnings have been shrinking slightly year-over-year as a result of weaker-than-expected sales during the pandemic. The second is that its pipeline is looking rather thin after management opted to discontinue a pair of lackluster clinical programs. In summary, the market may be underestimating the company's future earnings prospects by overreacting to the loss of the canceled programs and economic headwinds. New programs based on Linzess are likely to be initiated soon, and those programs may well succeed where the others failed, potentially allowing it to steal market share from over the counter (OTC) drugs that serve the same role. Keep an eye on this company to see whether its next few earnings reports send the price upward, or whether its scarcity of new pipeline drug candidates and relatively slow revenue growth prove to be a drag.

Data source: Y-charts. 

3. Coherus BioSciences

Coherus BioSciences (CHRS -5.46%) sells Udenyca, a biosimilar to Neulasta, which treats febrile neutropenia. The company is currently awaiting the final "OK" from regulators for another biosimilar product after a successful run of clinical trials. It also recently spent $150 million for the rights to develop a highly promising therapeutic antibody in conjunction with Shanghai Junshi Biosciences. That antibody, called toripalimab, has already been tested in late-stage clinical trials, and it could be approved to treat nasopharyngeal carcinoma sometime in 2021. Given that Coherus has several assets that could drive its growth, why haven't investors been eager to scoop up its shares? 

While Coherus is profitable, quarterly revenue growth was relatively flat at 1.7% in Q4 2020, and its earnings shrunk even faster (by more than 40%). More importantly, until it sealed its deal with Shanghai Junshi, it didn't have any new therapies -- only biosimilars. In other words, until recently, Coherus was more like a small generic medication manufacturer than a typical biotech company. The market is still valuing it as a generic drug manufacturer, so the company's work as a biotech probably isn't fully priced into the valuation yet.

That's an important discrepancy, especially if it continues development of toripalimab beyond the initial project. Coherus is already planning to investigate combination therapies incorporating the drug, which could massively increase its intangible value in the form of intellectual property and create several lucrative new pipeline projects at the same time. When the market notices that its intangible assets have multiplied, the price will follow accordingly. Add Coherus to your watch list, and wait to see whether the market thinks its new therapy candidate is worth paying biotech prices for, and act accordingly.