Top 3 Cheapest Biotech Stocks to Buy Now? (2019 Review)
Biotech stocks can offer growth to a portfolio, so today I’ll look for the cheapest biotech stocks in the stock market.
By “cheapest”, we want stocks that are selling at a discount to intrinsic value. That can be difficult to determine since biotech stocks are either well-established and selling at or above intrinsic value, or are speculative and overpriced.
So we need to be careful in our selections, and find those biotech stocks that are either true growth stocks with the earnings to back them, or legacy companies with lots of success that are trading below what we think they are worth in the long run.
Thus, let’s keep in mind that we are looking not only for the cheapest biotech stocks, but also the safest ones.
The Cheapest Biotech Stocks For 2019
If you’re in a hurry, below are our picks for the most lowest priced biotech stocks as of this writing.
- Celgene: Established products on the market, with more on the way.
- Amarin: Speculative, but it could have a blockbuster on its hands.
- AbbieVie: Beaten down but a long term winner.
Keep reading and you’ll learn more about these inexpensive biotech stocks and my thoughts on them.
What Are Biotech Stocks?
Biotechnology focuses on one thing: drug development. Biotech stocks work on discovering new therapies, and that can be an expensive proposition with either massive reward, or bankruptcy. Thus, it’s a very risky sector.
Biotech products can take years to develop and get to market. Roughly 90% of drugs never make it to the market, because the Food and Drug Administration has a very rigorous protocol for making sure that drugs work and are safe.
Most biotech companies only handle discovery and testing of a drug, and then hand off the marketing to someone else.
The key thing to realize with biotech companies is that not all diseases will be worth a lot of money to treat. It may sound cold, but a company is going to be interested in developing a drug for a disease that afflicts millions as opposed to thousands.
How Do You Determine What Qualifies As The Cheapest Biotech Stocks?
The cheapest biotech stocks have at least two of these three characteristics:
- Products on the market generating positive cash flow.
- Ongoing research.
- A portfolio of candidates.
Products and cash flow
Obviously, biotech stocks are less risky if they actually have products already on the market. That means they have had success with the long process of getting a drug to market.
Being on the market isn’t enough, though. Those drugs need to be generating significant revenue, such that the cash flow they put out is enough to fund ongoing R&D, and to pay expenses.
A drug that isn’t producing much revenue isn’t worth pursuing as an investor.
Biotech stocks are always trying to maintain relevance. So there is constantly a scramble to find cures, and other companies are working on the same diseases. Thus,
the cheapest biotech stocks will also have the working capital to research new drugs on an ongoing basis.
It’s a big step to get a drug approved and to market, but a biotech stock cannot rest on its laurels. It needs to be engaged in ongoing research, because the ramp from start to finish can be ten years or more.
A portfolio of candidates
I talk a lot about diversification in many different contexts. That’s very true of biotech stocks. Any biotech company needs to have multiple drugs in development because of the high failure rate. If there’s only one or two drugs being developed and they fail, the company could easily run out of capital or even go bankrupt.
This version of portfolio theory gives companies flexibility in terms of how and when to deploy capital, and to respond to changes in the market regarding the diseases they are researching.
Here’s a video that helps you with investing in biotech stocks, and finding a few candidates.
What is it?
Celgene Corporation is primarily focused on some big markets: the treatment of cancer and inflammatory diseases. REVLIMID is its big winner, accounting for about two-thirds of its revenue. It tackles different forms of myeloma lymphoma.
OTEZLAi s a relatively new drug that has had great results treating psoriatic arthritis and psoriasis. ABRAXANE treats breast, lung, pancreatic, and gastric cancer.
Other drugs treat leukemia, leprosy, non-hodgkin lymphoma, solid tumor cancers, and hematological cancers. Celgene has numerous marketing and sales agreements with other pharmaceutical players.
Read Also: Our Celgene Stock Prediction
What makes it a cheap stock?
Celgene is priced very favorably. At $68 per share, with 2019 earnings estimated at $10.35 per share, it trades at less than 7x earnings, while analysts see five year earnings growth at three times that amount (21%).
Celgene obviously has a portfolio of performing drugs as well as several candidates. Next year it should apply to the FDA to get approval for its multiple sclerosis drug Ozanimod.
It also has very encouraging test results for Phase 3 drugs luspatercept (which treats some rare blood disorders).
Celgene’s cash flow is remarkable, generating $2.65 billion in 2014, which grew to $5 billion in 2017, and about $4.15 billion in the last twelve months.
The stock is also more than 50% off its all time high.
What is it?
Amarin is definitely the riskiest selection in this article. It has one drug, Vascepa, which the FDA has approved to reduce triglyceride levels, and can do so by as much as 33% without raising cholesterol.
The drugs serves about 150,000 patients and will generate close to a quarter-billion dollars in revenue.
But the better news is that a recent clinical study showed Vascepa could be 30% more effective than the big-name drugs treating cardiovascular problems.
Thus, it could be a blockbuster. COULD BE.
What makes it a cheap stock?
Amarin is unlike most biotech stocks in that it has a drug that is producing revenue. It also shows a gross profit, before company expenses kick in, and generate net losses to the tune of about $100 million.
However, the Vascepa results are so good that the company should have no trouble doing what few other biotech stocks can do at this stage: get loans. It can use debt capital to continue pushing forward on its new product.
Cash burn is still occurring, but the past twelve months it has only been about $68 million, and it has $82 million in cash on the books.
The stock is very risky! The Vascepa therapy may not go anywhere. But if it does, there’s more upside here.
What is it?
AbbieVie is the opposite of Amarin. It’s been around a long time, spun off from a very large company, with a huge set of performing drugs and a strong pipeline. Check out just a sample of its products:
HUMIRA is the current flagship, which is used for autoimmune diseases. IMBRUVICA treats chronic lymphocytic leukemia. VIEKIRA PAK treats chronic hepatitis C. Kaletra is an important and well-known treatment for HIV, along with Norvir.
AndroGel is a testosterone replacement therapy for males diagnosed with symptomatic low testosterone. Lupron is a palliative treatment of prostate cancer and anemia. Duopa and Duodopa handles Parkinson’s disease.
What makes it a cheap stock?
AbbieVie has gotten a lot of bad press lately and it just had a big change in senior management. Yet it remains a premier and established biotech player, with solid results and solid long term potential.
It has ongoing research and a portfolio of established drugs and candidates. It routinely generates over $5 billion in net income each year, and over $8.4 billion in just the past twelve months.
Free cash flow exploded from $2.9 billion in 2014, to $7 billion in 2015, to $9.4 billion last year, and to over $12 billion in the past twelve months. Thanks to that robust cash flow, it is easily able to pay its 5% dividend – a dividend that’s been growing rapidly.
It has over $10 billion of cash on hand.
Analysts project an annualized growth rate of 16.8% over the next five years, and yet the stock only trades at 10x next year’s earnings.
Thus, with a PEG ratio of only 0.6, it is arguably as much as 40% undervalued, and in a very safe position for the long term.