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It's been a rough couple of months for biotech investors, as the entire sector has been sold off hard since the summer. The iShares Nasdaq Biotechnology ETF (IBB 2.49%), which holds a huge collection of biotech stocks, is down more than 20% since peaking in mid-July. However, just because the sector as a whole is down, it doesn't mean that every biotech stock has been hit equally hard. In fact, even after the sell off, we Fools think that several biotech stocks are still being completely mis-priced by the market.
We asked our team of healthcare contributors to highlight companies that they believe the market just doesn't fully understand. Read below to see if you agree with them.
George Budwell: GW Pharmaceuticals plc (GWPH +0.00%) is a British biopharma developing therapies for cancer pain, multiple sclerosis, and childhood epilepsy, among others, using compounds derived from marijuana called "cannabinoids". Besides being among the first pharmas to attempt to bring marijuana-based medical products to market, GW is noteworthy because its share price has appreciated an astounding 850% in the last two years.
While the market is obviously uber-bullish on GW's stock, I think this enthusiasm is misguided. My belief is rooted in the fact that a good chunk of GW's present valuation is tied to the potential of the experimental product candidate Epidiolex, and to a lesser degree Sativex, to grab cancer-related pain indications.
Beyond just disappointing trial results thus far, the crux of the issue is that GW's stock is currently trading at 4 times its estimated 2019 revenue (according to data provided by S&P Capital IQ), and almost all of this revenue is expected to come from products that are still in clinical trials. GW is thus garnering a similar premium as top biopharmas with major products already on the market with far more diverse clinical pipelines.
Given that no clinical candidate is guaranteed to succeed and analysts often miss the mark when estimating the commercial performance of experimental-stage products, I think GW's current valuation is questionable to say the least.
Todd Campbell: Patients and payers are right to be up in arms after the media exposed the mind-numbing greed of Turing Pharmaceuticals, which acquired a 60-year old drug, Daraprim, solely to jack up its price by 5,000%. But investors ought to avoid painting a every company that's picking up existing medications on the cheap with too broad a brush.
For example, investors have pounded DepoMed (DEPO 0.66%) on concerns that its business model of rebranding existing medications is doomed. But DepoMed isn't Turing Pharmaceuticals.
DepoMed markets six compounds, five of which it's acquired from other drugmakers, and while it's increased prices on those medications, its pricing strategy has been to lift prices up to the level of competitors, rather than gouge a market in which it holds a monopoly.
For instance, DepoMed acquired opioid pain reliever Nucynta from Johnson & Johnson earlier this year. The drug's market share is less than 5%. As part of DepoMed's Nucynta launch, it increased prices to bring it in line with the market leader, Oxycontin.
If investors end up agreeing that DepoMed isn't a Turing look-a-like, then picking up shares might be wise. If Nucynta can win away scripts from Oxycontin, then Nucynta could have billion dollar blockbuster potential -- and if so, DepoMed's $1.15 billion market cap could be a bargain.
Brian Feroldi: Insys Therapeutics (INSY +0.00%) has been like a rocket ship over the past 5 years, with shares up more than 300% thanks largely to the rapid adoption of Subsys, its pain reliever used to help patients undergoing cancer treatment.
This under-the-tongue spray is easy to dose and works very quickly, so it's been gobbling up market share since first launching in 2012, turning Insys from a money-losing enterprise into a highly profitable company. Sales continue to grow quickly as well, up 40% in the last quarter compared to the year ago period.
There is also reason to believe that strong growth could continue well into the future, as the company has submitted an oral formulation of Marinol for approval, a product that the company believes holds sales potential of around $200 million annually. It is also looking to expand the labeling for Subsys to be used to treat other diseases as well, and the drug's rapid action may help it gain market share in new indications.
And yet, despite everything the company has going for it, Wall Street continues to bet big against this stock's future, as more than 73% of the company's available shares have been sold short. The reason for this bearishness is likely due to the company's previous marketing practices, which got it in some hot water last year. It has since reached a settlement with the Oregon Department of Justice and paid a small fine, but clearly many investors are expecting more bad news in the future.
While it's possible that the company could get hit with more fines, I think the company has learned its lesson -- and if the company can continue to put up great results, the stock may be primed for a short squeeze.
