10 underappreciated biotech stocks to buy

  • By James Brumley,
  • Kiplinger
  • – 07/03/2018
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When investors think of biotech stocks, visions of Amgen (AMGN) and Gilead (GILD) tend to dance in their heads. These companies aren’t just among the biggest in the business – they’re also a couple of the most successful in terms of revenue and profits.

However, as the old adage goes, the best things often come in small packages. Smaller biotechnology companies can and often do offer better growth prospects.

There are commonsense limits, of course. Too many biotech companies are only chasing a dream, while others are thinking too conservatively. Still others are undercapitalized, standing shoulder-to-shoulder with far bigger, better-armed outfits. There are plenty of reasons not to step into a particular biotechnology firm.

Every now and then, though, a hidden gem emerges that most investors simply don’t notice.

Here’s a closer look 10 underappreciated biotech stocks. Some are bigger than others, and each is at a different point along at least one drug-development path. In all cases, however, too many traders are looking past their plausible potential – but may not be for long.

Data is as of July 2, 2018.

Horizon Pharma

Horizon Pharma reported first-quarter results in May, and they were something of a letdown. Sales and earnings both missed analyst expectations, and HZNP shares took a hit as a result … for all of one day.

In fact, not even half a day. Half of the May 9 plunge was wiped away before the session’s closing bell. And the stock currently is trading 15% higher than where it sat before its quick earnings plunge.

Traders quickly realized that despite the shortfall, the company’s sales of its orphan drugs and rheumatology drugs – it core business – were up 11% year-over-year, and that growth is just getting started.

Horizon Pharma’s primary claim to fame is a drug called Krystexxa, for the treatment of chronic gout. It generated $46.7 million in sales last quarter, up 48% year-over-year, to become the company's second-best seller. Horizon’s best-selling therapy still is Ravicti, an orphan drug for the treatment of urea cycle disorders, which saw sales growth of 12% to reach $49.1 million in revenue last quarter. Given its growth rate, though, Krystexxa should become the breadwinner during the second half of this year.

What’s largely being overlooked by investors is that Krystexxa hadn’t been marketed in earnest until this year, and Ravicti was only launched in Europe this March.

Analysts are looking for just 11% revenue growth this year, and about a 9% improvement in 2019. That last-mile sales growth, however, should pull the company well into the black. Meanwhile, HZNP’s forward-looking operating price-to-earnings ratio is cheap at just more than 9.

Jazz Pharmaceuticals

A relatively small, young biotech company that’s not only profitable, but growing both its top and bottom lines?

It’s not unheard-of, but it’s uncommon. The “trick,” so to speak, is a portfolio of marketable drugs that don’t invite tons of competition. Jazz Pharmaceuticals is the maker of Xyrem, Defitelio, Vyxeos, Erwinaze, Prialt and FazaClo: drugs that most patients and investors have never heard of. That’s OK. Jazz has found its niches and executes its business model well. Last quarter’s top line grew 18% YoY, and operating income grew by 29%.

There are some clear breadwinners. Xyrem, for the treatment of narcolepsy, accounts for a little more than 70% of the company’s sales. That’s fine for now, as Xyrem’s sales are soaring – they grew 16% last quarter – but it is creating a double-edged sword. Morningstar analyst Kelsey Tsai recently wrote, “Jazz’s reliance on its Xyrem franchise, uncertainty around its next-generation products, and lack of visibility on its pipeline beyond Xyrem form the basis of our current no-moat rating.”

Even so, Tsai likes that the company’s management is made up of smart deal-makers. She writes, “We believe Jazz is one of the better acquirers in the specialty pharma industry. In addition to its early adoption of the inversion strategy, Jazz has shown patience in waiting for the right deals – orphan products with favorable prospects.”

Vertex Pharmaceuticals

The cystic fibrosis treatment market is expected to be worth nearly $14 billion by 2025. But the market has been so poorly served in the past that it’s difficult to accurately gauge the true size of the opportunity.

If any single company is going to help define the true size of the CF market – by dominating it – it’s Vertex Pharmaceuticals. Vertex sold $638 million worth of cystic fibrosis drugs last quarter alone, a 33% year-over-year improvement.

And it’s just getting started.

Top-selling drug Orkambi was approved less than three years ago, while Kalydeco got its first FDA green light in 2012 and has gradually been approved for related CF indications in the meantime. Both drugs, in fact, are getting the nod for more variations in CF and its symptoms. Those ongoing approvals and the introduction of other ones in the pipeline could drive $6.3 billion in annual revenues for Vertex by 2022. That’s roughly 2.5 times what the company has produced over the past four quarters.

A bonus: Last month, a company called Proteostasis (PTI) – arguably the biggest threat to Vertex Pharmaceuticals – unveiled lackluster results from a key cystic fibrosis drug it was testing. Leerink analyst Geoffrey Porges wrote, “Failure to match the high (effectiveness) bar established by Vertex is a testament to the difficult development path for competitors with small molecule therapies for cystic fibrosis.”

Akcea Therapeutics

Akcea Therapeutics isn’t a profitable biotech company – yet. But, that doesn’t necessarily mean it’s not worth owning here and now.

It’s speculative, but trading veterans know that biotechnology stocks often trade on the changing odds of future success. Akcea has a compelling portfolio and pipeline, and therefore has a bright future.

The company is hyper-focused on the treatment of rare diseases. Familial chylomicronemia syndrome (FCS), familial partial lipodystrophy (FPL) and non-alcoholic steatohepatitis (NASH) are just a handful of the indications Akcea is taking aim at, with a total of six novel drugs in development. The company also is already driving some revenue; it started to produce sales in early 2017, thanks to a partnership with Novartis (NVS).

The foreseeable future could be game-changing. Analysts are looking for this year’s projected revenue of $105 million to swell to $444 million next year, with Inotersen (for heridatary ATTR amyloidosis) and Volanesorsen (for familial chylomicronemia syndrome) both done with Phase III trials and now in the process of registration. The latter will likely get a yes-or-no decision from the FDA in late August, but it looks like analysts have already modeled an approval.

Five more trials are underway right now, and more being planned for the company’s versatile drugs.

Ligand Pharmaceuticals

Don’t let the trailing P/E of 96 fool you. With just a little more time to grow, Ligand Pharmaceuticals will work its way into a more palatable valuation.

Ligand isn’t a biopharma stock in the traditional sense of the terms. Rather than developing drugs from the ground up using an R&D platform created by someone else, Ligand Pharmaceuticals makes or acquires the underlying technologies that allow other companies to develop new drugs. Its HepDirect biotechnology, for instance, is a way of keeping a liver drug from activating until it actually reaches the liver. Its SUREtechnology Platform allows for a specific manipulation of genetic material to create specialized proteins.

Ligand still participates in drugs’ successes; it earns a sizeable cut of revenue created by drugs developed on its platforms. Amgen, for instance, pays Ligand as much as 3% on sales of its myeloma treatment Kyprolis.

The business model may limit the company’s revenue, as some other organization will always reap the bulk of the benefit of any successfully marketed drug. But the business model also limits Ligand’s downside, as the company doesn’t take on the risk or expense of direct drug development.

Perhaps best of all, Ligand Pharmaceutical likely always will have a new revenue stream (if not several) on the horizon.

Bluebird Bio

CAR-T – short for chimeric antigen receptor T-cell treatments – is a relatively new category of drug that holds tremendous promise for a variety of indications, and cancer in particular.

This opportunity is a big part of the reason Patrick Healey, President of New Jersey-based Caliber Financial Partners, is keeping close tabs on Bluebird Bio. Its lead developmental drugs, bb2121 and bb21217, are both CAR-T programs. Both are being co-developed with biopharma powerhouse Celgene (CELG).

Healey also notes the acquisitions that have already happened within the CAR-T market, pointing out that “Juno Therapeutics and Kite Pharmaceuticals were acquired by Celgene and Gilead in 2017 at significant premiums to their previous trading price.”

The prospect of a buyout isn’t necessarily a reason in and of itself to own a stock, but it doesn’t hurt the bullish case. Neither does the sheer diversity of Bluebird’s pipeline. Outside of the cancer realm, bluebird is testing two drugs for three different genetic diseases and has begun work on a gene-editing product that so far has remained secretive.

Bluebird has no meaningful revenue yet, and therefore no profits. Again, though, sometimes a company’s R&D trajectory is enough.

Alnylam Pharmaceuticals

Alnylam Pharmaceuticals is another biotech outfit that is losing money, so tread lightly. But in that a story and a company’s prospects are often enough to lift a stock en route to profits, Alnylam is worth a look.

The future of medicine is at the intersection of genetics and protein-building. An errant gene can set the stage for disease by creating a damaging rather than helpful protein, and tweaking DNA or RNA – our genetic blueprint – can prevent the creation of dangerous, or dangerously ineffective, cells.

Enter Alnylam Pharmaceuticals. Its work in the arena of RNA interference (RNAi) is cutting-edge stuff, allowing gene-level therapy that may block the production of disease-causing proteins. The approach holds promise for diseases that simply can’t be addressed by any other kind of drug. Hereditary ATTR amyloidosis is one of these diseases, and it’s the big target Alnylam is taking aim at right now.

In short, hereditary ATTR amyloidosis is a condition in which a protein made by the liver that’s supposed to transport bodily building blocks (such as vitamins) is “folded” in such a way that it collects in the heart and digestive tract. It’s a rare condition, affecting only about 50,000 people worldwide. But there are no approved treatments for it, so Alnylam is well-positioned to dominate that market should its patisiran wins approval (as is largely expected) from regulators later this year.

Regeneron Pharmaceuticals

Sales growth and earnings growth? What’s not to like about Regeneron Pharmaceuticals?

You might be more familiar with the company than you think. Regeneron is the name behind cholesterol-fighting Praluent and age-related macular degeneration drug Eylea, both of which have been featured on television commercials. It has a handful of other drugs in its portfolio as well, plus a few more items of interest in its pipeline.

Oppenheimer analyst Hartaj Singh has high hopes for both groups, recently suggesting the company was “on the cusp” of a sales explosion in 2019 and 2020 driven by Eylea as well as dupilumab, which was approved as an eczema treatment in March. Singh also thinks cemiplimab will get the green light from the FDA as a treatment for advanced cutaneous squamous cell carcinoma later this year.

Yet there’s much, much more in the pipeline for investors who can be patient.

They may not even have to be that patient if Singh’s intuition about Regeneron’s structure and processes is on target. When he upgraded REGN, he also said the company “could follow up the left jab of accelerating sales with the right hook of operating leverage.”


The past 12 months haven’t been easy for Incyte. The stock is down by more than 45% since this time last year, with much of that weakness attributable to April’s news that its epacadostat – along with Keytruda, from Merck (MRK) – wasn’t effective enough to be used as a combo treatment for melanoma.

A little perspective may be in order. Even RBC Capital Markets analyst Brian Abrahams, who downgraded INCY shares in June, conceded, “We remain positive on Jakafi’s growth prospects in existing MF/PV indications, which we believe sets a solid foundation floor.” Abrahams added that even just for its currently approved uses, Incyte’s lead drug Jakafi could generate as much as $3 billion in annual revenue at its peak.

Abrahams’ issue? He writes, “The company’s impressive translational work and medicinal chemistry should help set (it) up well longer-term, but in the nearer term we would expect shares to trade in line until there is more visibility on meaningful new revenue opportunities.”

Fair enough. But as has already been noted, many biotech stocks can and usually do trade based on their long-term prospects. Incyte has plenty of those.

INCY has been beaten down badly for the past year despite double-digit sales growth from its current drug portfolio alone. More aggressive investors may want to take a closer look at this largely overlooked name.

Alexion Pharmaceuticals

Alexion Pharmaceuticals is one of those rare breeds of biopharma names that is not only already driving revenue, but also is profitable. Yet many investors don’t know about it, even if they’ve heard of the company.

Alexion is best-known for making Soliris, or eculizumab – a treatment for atypical hemolytic uremic syndrome and paroxysmal nocturnal hemoglobinuria. Those are, in simpler terms, problems with the functioning and creation of red blood cells. More than 80% of the company’s revenue is driven by Soliris.

The two other drugs in its portfolio are growing quickly, even if they’re still small pieces of the pie. Strensiq’s sales were up 50% year-over-year last quarter, while Kanuma’s sales grew 63%. The pipeline isn’t too shabby either – and in fact, one of the drugs in that pipeline may be tremendously underestimated, in terms of potential, and in terms of timing.

That’s ALXN1210: the paroxysmal nocturnal hemoglobinuria treatment that Alexion just requested get an expedited review from the FDA. If it gets that priority review and is approved (which several observers seem to think is likely), it could be a game-changer.

Leerink analyst Geoffrey Porges commented on the drug following a recent presentation, “It’s clear to us that ALXN1210 is even more differentiated than we had anticipated and is likely to dominate treatment of newly diagnosed paroxysmal nocturnal hemoglobinuria. RBC analyst Kennen MacKay said of the priority review’s potential, “While 2019 consensus estimates are not split by quarter, our U.S. estimate is based on a midyear launch, and we see an early launch likely leading to upside revisions.”

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