It can be a lot of fun buying stocks trading in the single digits. While there are a lot of bad companies down in the cheap seats, sometimes you can find some amazing bargains. Our roundtable has found three really cool biotech stocks trading under $10 a share.
Growth at a serious discount
Patrick Bafuma (SeaSpine): Looking at growth prospects, spinal surgery pure-play SeaSpine caught my eye. This healthcare company offers hardware for spinal implants as well as orthobiologics -- implanted medication at the surgical site that enhances bone repair after surgical procedures. It also offers a surgical navigation system designed to improve the accuracy of hardware placement, thus providing a faster and more cost-effective radiation-free surgery. In short, SeaSpine gives its orthopedic and neurosurgical customers a complete solution to meet patients' evolving clinical needs.
And business is picking up. In the first quarter of 2022, the company grew total revenue 21% over the prior-year period to $50.7 million, slightly exceeding the high end of guidance by $1 million. In fact, the company raised full-year 2022 revenue guidance by $5 million to a range of $231 million to $235 million. This reflects growth of approximately 21% to 23% over full-year 2021. SeaSpine also sports an adjusted gross margin of 62% for the first quarter and reminds me of another surgical supplier, Stryker, and its 64% margin. This is a good company to be in, considering Stryker has handily beat the S&P 500 over the last two decades.
SeaSpine expanded its product portfolio with the full commercial launch of four products and systems in 2021. It is guiding for a 15%-18% compound annual growth rate over the next three years and aims to be profitable by the end of 2024. This healthcare company trades below an Alexander Hamilton, yet its market cap of $220 million is actually below its 2022 full-year revenue guidance. Given that and its anticipated double-digit CAGR for the next few years, SeaSpine looks to swim past the market for years to come.
Re-imagining drug discovery
Taylor Carmichael (Recursion Pharmaceuticals): I've been binge watching Elementary this last week, a great modern-day update of Sherlock Holmes. Among other things, I love that Sherlock is an out-of-the-box thinker who tries to be logical and rational as he approaches crime. Some of his theories apply to drug discovery as well. After all, in both cases you are trying to solve a mystery.
Holmes hates concepts like "luck" and "guessing." (As a stock investor, I am totally on board with this hatred.) But he takes this antipathy even further. Holmes is very dubious about having a scientific hypothesis about a crime before you have enough facts. So his first move is always collecting data. This will result in a future hypothesis that is more likely to be right.
Recursion is trying to bring Sherlock's approach to drug discovery. There's a danger in scientists forming a hypothesis about a disease before they have data, known as "confirmation bias." They're looking for positive data to confirm their hypothesis, and they're blind to the negative data that negates it. This human bias is perhaps why so many drugs fail to make it to market (almost 90% of them).
Recursion has a new way to find drugs. The biotech has created a massive map of biology. Using artificial intelligence (AI), Recursion has run 100 million highly reproducible experiments. From this data set, the AI software has inferred 240 billion biological relationships that might help scientists treat diseases. Researchers accessing this data can now create a data-based hypothesis, using human intuition to find drugs that are more likely to work well.
|Traditional Drug Discovery Approach||Recursion Drug Discovery|
|Review the scientific literature||Review an AI map of biology|
|Generate a hypothesis||Navigate a massive index of machine-generated hypotheses created from the results of 100 million experiments|
|Try to validate the hypothesis||Already validated|
|10% success rate in humans||Unknown success rate in humans|
Right now Recursion has a small market cap ($1.5 billion), and an even smaller amount of revenue ($13 million over the last year). This biotech doesn't have a P/E ratio, and it's P/S ratio is astronomical. Nonetheless, there was a fair amount of excitement at the IPO, probably because mega-caps like Roche and Bayer are collaborating with the biotech, and Cathie Wood is an investor.
The stock is now down about 71% from its IPO, and in this market it might fall further. But I suspect Recursion will emerge a big winner with its data-based approach to drug discovery. If you're interested, I would suggest opening with a small position (under 1% of assets).
A potential 10-bagger
George Budwell (Agenus): Agenus is a small-cap immunotherapy company with enormous potential as a growth vehicle for patient investors. Although the company's share price has jumped by a whopping 61% over the last 30 days, Agenus' stock is still down by an eye-catching 59% from its 52-week high.
Agenus' shares have started to turn the corner recently due to an important clinical update for its next-generation CTLA-4 antibody known as botensilimab. Specifically, botensilimab, when used in combination with the PD-1 inhibitor balstilimab, reportedly produced an unprecedented overall response rate in patients with microsatellite-stable colorectal cancer.
To date, Agenus' lead anti-cancer candidate has shown clinical activity across nine different types of cancer that do not respond to the current slate of available immunotherapies. Put simply, this biologic anti-cancer therapy could be a game-changer for scores of patients with hard-to-treat malignancies.
What's more, Agenus also has a handful of high-value collaborations underway. As things stand now, the company has $2.8 billion in potential milestone payments in play from a host of partners such as Bristol Myers Squibb and Gilead Sciences. That's a sizable amount of money for a company with a market cap under $800 million at the time of this writing.
The bottom line with Agenus is that the company does have a long way to go to realize its full potential. Botensilimab, after all, is only in mid-stage development right now. But with a possible franchise-level drug in hand and multiple partnerships in full swing, Agenus' stock appears poised for a long-tailed growth spurt in the years ahead. In fact, this small-cap biotech arguably has the very real potential to morph into a large-cap immunotherapy behemoth by the end of the decade.