There are many investors that believe that the stock market is currently overvalued. To a great extent, they may be correct as there is a lot of excessive valuation to be found in various segments of the market. However, as I believe it is a market of stocks and not a stock market, not everything in today’s stock market is expensive. In fact, there is one sector specifically where bargains galore can be found. That sector is the healthcare sector, and more specifically the subsectors biotechnology and specialty pharmaceuticals.
As I will illustrate in greater detail later, the biotechnology and specialty Pharma segment of the stock market has been very weak over the past year or so. There are a lot of reasons offered as to why this segment has been so weak. Threats of drug price reform seem to be the predominant culprit. Nevertheless, negativity towards this sector has driven valuations to what appear to be absurdly low in many cases. I believe this is especially true for companies with solid profitability and ample cash flow generation.
As a long-term investor extensively focused on valuation, I am always on-the-lookout for bargains. My definition of a bargain is when I can identify a stock that is selling for significantly less than its fundamentals would indicate. In the healthcare sector specifically, there are a lot of small promising biotechnology and pharmaceutical companies that have yet to generate a profit. On the other hand, there are many that are already quite profitable. The focus of this article is on identifying profitable biotechnology and pharmaceutical stocks that appear to be unjustly undervalued by the market.
In a previous article published on June 10, 2016 found here I presented 5 companies in the sector that I considered attractive long-term investment opportunities. In this article, I am presenting 10 additional exciting looking research candidates within this sector. What follows next is a repost of what I wrote in the introduction of this last article. I am not adding quotes because the words are mine.
Personally, my primary current investment objective is focused on achieving a reliable and growing dividend income stream. That doesn’t mean that I don’t expect capital appreciation to go along with my dividends, because I do. However, capital appreciation is secondary to what I need right now. Therefore, I am content to allow it to happen over the long run. This means being willing to accept the ups and downs of short-term market volatility that is sure to occur, as long as my dividend income keeps increasing.
On the other hand, I also have discretionary assets that I can invest in/or utilize outside of my core portfolio. So, even though I favor dependable dividend-paying stocks, I still am attracted to examining exciting growth investments with money I am both willing to and can afford to lose. However, even though I’m willing to lose with these discretionary assets, I don’t expect to. Instead, my objective is to generate significantly higher total returns than my prudent dividend growth portfolio is realistically capable of achieving.
More simply stated, I still appreciate powerful and exciting growth stocks because I understand they are capable of generating significantly higher returns. However, I am also cognizant of the fact that the risk associated with achieving those returns is also significantly higher. Consequently, I am just as adamantly (or even more so) focused on valuation when investing in growth stocks as I am with prudent, blue-chip dividend-paying stocks.
One of the most difficult things for the value-oriented investor to accept and embrace is the reality that the best value comes from stocks that are temporarily out-of-favor. In this regard, the value investor must also recognize that hitting the perfect bottom can only be accomplished with luck. Therefore, the intelligent value investor is willing to assume some short-term pain in order to achieve long-term gain.
The biotechnology sector contains many exciting growth stocks. But, most importantly, as it relates to this article, the sector has recently been out-of-favor, which I believe has created bargain investment opportunities. Consequently, I offer the following 10 biotechnology and specialty Pharma stocks as attractive looking research candidates primarily for growth or long-term total return. However, the first 3 research candidates in this group do offer intriguing prospects for dividend growth as well. Therefore, I hope the following list of healthcare stocks will offer something for everyone.
10 Undervalued Biotechnology and Specialty Pharma Stocks
The following portfolio review lists the 10 research candidates offered in this article in order of lowest P/E ratio to the highest P/E ratio. Consequently, I asked that the reader focus on the P/E ratio column to gain a perspective and insight into just how undervalued many of these companies truly are.
Dividend Growth and Total Return
These first 3 candidates do pay a dividend; however, their dividends may not be attractive enough for the conservative dividend growth investor. Nevertheless, I believe each of them offers a compelling opportunity in their own right – but not without risk. I have presented a short description of each of these candidates, as well as all the other candidates in this article courtesy of S&P Capital IQ. I have also included an earnings and price correlated FAST Graph to illustrate how significantly undervalued many of these names are.
Gilead Sciences, Inc. (GILD)
“Gilead Sciences, Inc., a research-based biopharmaceutical company, discovers, develops, and commercializes medicines in areas of unmet medical needs in North America, South America, Europe, and the Asia-Pacific. The company’s products include Genvoya, Stribild, Complera/Eviplera, Atripla, Truvada, Viread, Emtriva, Tybost, and Vitekta for the treatment of human immunodeficiency virus (HIV) infection in adults; and Harvoni, Sovaldi, Viread, and Hepsera products for the treatment of liver diseases. It also offers Zydelig, a PI3K delta inhibitor, in combination with rituximab, for the treatment of certain blood cancers; Letairis, an endothelin receptor antagonist for the treatment of pulmonary arterial hypertension; Ranexa, a tablet used for the treatment of chronic angina; Lexiscan/Rapiscan injection for use as a pharmacologic stress agent in radionuclide myocardial perfusion imaging; Cayston, an inhaled antibiotic for the treatment of respiratory systems in cystic fibrosis patients; and Tamiflu, an oral antiviral capsule for the treatment and prevention of influenza A and B.
In addition, the company provides other products, such as AmBisome, an antifungal agent to treat serious invasive fungal infections; and Macugen, an anti-angiogenic oligonucleotide to treat neovascular age-related macular degeneration.
Further, it has product candidates in various stages of development for the treatment of HIV/AIDS and liver diseases, such as hepatitis B virus and hepatitis C virus; inflammation/oncology; serious cardiovascular; and respiratory conditions, as well as diabetic nephropathy and ebola.
The company markets its products through its commercial teams and/or in conjunction with third-party distributors and corporate partners. Gilead Sciences, Inc. has collaboration agreements with Bristol-Myers Squibb Company, Janssen R&D Ireland, Japan Tobacco Inc., and Galapagos NV. The company was founded in 1987 and is headquartered in Foster City, California.”
Shire plc (SHPG)
“Shire plc, a biotech company, together with its subsidiaries, engages in the research, development, licensing, manufacture, marketing, distribution, and sale of medicines for patients with rare diseases and other select conditions.
Its principal products for the treatment of attention deficit hyperactivity disorder (ADHD) and binge eating disorder include VYVANSE/VENVANSE/ELVANSE/TYVENSE/ELVANSE VUXEN/ADUVANZ, as well as