There is nothing worse than getting stuck holding a speculative biotechnology stock just after it crashes. That is the norm: biotech stocks are inherently risky. Their valuation depends on good clinical results or higher sales, depending on where the company’s product fits in the cycle.
Valuations vary greatly depending on the biotech company’s future prospects. Some generic drugmakers, for instance, are trading at steep discounts for a number of reasons, including suspected price collusion.
Companies about to launch a new drug, or about to win FDA approval, trade at expensive valuations. Investors are betting the future revenue prospects outweigh the stock price multiples.
Below are three drug stocks that sold off and could rebound as investors look toward future growth.
Biotech Stocks to Watch: Horizon Pharma (HZNP)
Horizon Pharma PLC’s (NASDAQ:HZNP) horrendous Phase 3 clinical trial results for Actimmune, which treats Friedreich’s ataxia, sent the stock to a $14 a share low near the end of 2016.
Markets, however, ignored this key statement:
“The announcement today does not impact Horizon Pharma’s full-year 2016 adjusted net sales or adjusted Ebitda guidance, and the Company believes it is well-positioned for growth in 2017 and beyond based on its existing portfolio of medicines.”
Shortly after, Mizuho upgraded HZNP stock and set a $25 target price, up from a previous PT of $14. That upgrade was in response to Express Scripts removing two Horizon treatments from its exclusion list — Duexis and Vimovo. This, Mizuho notes, should allow HZNP to trade “closer to its fundamental valuation.”
At these levels, the stock trades at 6.9 times forward earnings. If earnings grow by more than the expected 18% in the next five years, HZNP stock will look like a steal today.
Biotech Stocks to Watch: Synergy Pharma (SGYP)
Synergy Pharmaceuticals Inc (NASDAQ:SGYP) slumped after the FDA approved Trulance on Jan 19. Trulance, or plecanatide, is a drug that stimulates digestive fluid movement and treats chronic idiopathic constipation (CIC). It was SGYP’s first regulatory win, but investors were wary of the caveat that Trulance’s safety and effectiveness had not been established in patients under the age of 18.
SGYP staged a comeback over the following weeks, leading up to SGYP pricing a public offering of 20.3 million shares at $6.15 a share, which is typical of biotech companies taking advantage of higher share prices. The market, however, reacted with another selloff of SGYP shares.
Yet, Synergy’s prospects are strong and the share sale will raise the money it needs to develop the market for its drug. Do not forget the prospects of SGYP getting bought out. A drug company with more money and a developed channel would grow if it bought Synergy.
Biotech Stocks to Watch: Keryx Biopharmaceuticals (KERX)
The dip, however, creates yet another entry point for this highly volatile supplier of renal disease treatments. The Auryxia supply-chain problem last summer is behind it and the company is positioned to meet the strong demand ahead. What’s more, Keryx has plenty of cash ($112 million), strong sales in the quarter and more growth ahead.
At the annual J.P. Morgan Healthcare Conference, Keryx said there are 26 million adults with chronic kidney disease (CKD). That translates to a nearly $2.8 billion market for iron deficiency anemia (IDA) treatment. In 2017, Keryx’s program goal involves driving growth and ensuring patients have access to Auryxia.
Consider that KERX is expected to grow earnings by just shy of 60% next year and in the triple-digits over the long term. Those are not numbers to sneeze at.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.