Biotech stocks got pummeled in 2022. Valuations across the small- and mid-cap biotech landscape cratered last year as the concept of "deep value" got zeroed out by rising interest rates and a general flight to safety.
As a result, there are scores of developmental biotech companies trading at a fraction of their net cash positions right now. This tsunami of selling in the space, though, has seemingly created some tremendous opportunities for investors with a long-term mindset.
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Which biotech stocks sport the juiciest risk-to-reward ratios right now? The following two stocks are screaming buys, based on their underappreciated pipelines and near-term prospects.
1. Arrowhead Pharmaceuticals: 130% upside potential
Arrowhead Pharmaceuticals (ARWR -1.24%) is a leader in the emerging gene silencing space via its cutting-edge RNA interference platform. The company sports a wide variety of licensing deals and big-pharma collaborations, which has given it one of the longest cash runways within the clinical-stage biotech space (almost four years, based on its current burn rate and recent milestone payments).
Still, Arrowhead's value proposition has failed to land with investors. Thanks to a foggy data readout in alpha-1 antitrypsin (AATD) liver disease and Johnson & Johnson ending their $3.7 billion collaboration, Arrowhead's shares have taken a nearly 50% haircut over the prior year.
The stock's bullish analysts, though, think this decline is overdone. Speaking to this point, the consensus price target on Arrowhead's shares currently implies a staggering 130% upside potential.
What's ahead? Over the course of 2023, Arrowhead is expected to initiate a handful of late-stage trials and announce a bevy of top-line clinical data across a wide variety of indications. The company thus has a real chance at creating enormous value for shareholders this year.
That being said, Arrowhead is a long-term play, due to the extended timelines inherent in drug development. As such, its stock is best suited to investors with an elevated tolerance for risk.
2. Seres Therapeutics: 92% upside potential
Seres Therapeutics (MCRB -4.16%), a microbiome therapeutics company, is on the cusp of a major regulatory approval that could light a fire underneath its shares soon. In brief, Seres is expected to learn the regulatory fate of its orally administered Clostridioides difficile treatment known as SER-109 by April 26, 2023.
The therapy would likely gobble up market share as an alternative to one-time rectally administered treatments. C. difficile is a fairly common bacterial infection that causes diarrhea and inflammation of the colon.
Wall Street analysts think that SER-109, at its peak, could rake in upwards of $750 million in annual sales. That's quite a haul for a company with a sub-$1 billion market cap.
The one minor drawback is that Seres has a co-commercialization agreement in place with Nestlé Health Science. As a result, the biotech will have to share profits from SER-109's sales on a 50/50 basis. That being said, Seres could grab additional payments worth up to $350 million if the therapy reaches certain regulatory and commercial milestones.
All told, Seres stock has a very realistic shot at a dramatic upward move in the event this novel microbiome therapy reaches the market.
