The Cheapest Stocks in Biotech

By Markets

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Biotech is, without question, the biggest roll-of-the-dice industry you can choose to invest in.

Over 90% of publicly traded biotech stocks are expected to lose money in 2017, and the vast majority of discovery, preclinical, and clinical studies end in failure. In fact, Medscape suggested some years back that just one out of every 5,000 to 10,000 drugs examined in preclinical trials will ever make it to pharmacy shelves.

However, being right just a small handful of times can lead to phenomenal rewards, which is why biotech can also be such a fascinating industry to dig into. Before it was purchased by AbbViein 2015, cancer drug developer Pharmacyclics, which is perhaps best known for co-developing blood cancer blockbuster Imbruvica, rallied from less than $0.60 per share in Feb. 2009 to its purchase price of $261.25 a share. That's about a 45,700% return, in case you were wondering. It only takes one or two home runs in the biotech space to completely change your retirement outlook.

Biotech's cheapest stocks

Investors have two choices when trying to find these home run stocks in biotech. Either they place their bets on some of the more than 90% of biotech companies currently losing money and hope for the best in clinical trials or they stick with the slim group of already profitable biotech companies and dig for bargains. If you prefer to take the latter, safer route, there are a handful of potential bargains in biotech.

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After running a screen of the 26 biotech stocks expected to be profitable in 2017 with a market cap north of $300 million, these stood out as the cheapest stocks in biotech based on forward P/E.

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Gilead Sciences

When it comes to cheap biotech stocks, it's a landslide victory for Gilead Sciences (NASDAQ: GILD), which is sporting a forward P/E of just seven. It's the only biotech stock with a single-digit forward P/E, which is both indicative of its amazing earnings power as well as how much investors have knocked Gilead off its all-time high set last year.

The allure of owning Gilead Sciences is its dominant market share in hepatitis C, as well as the benefits reaped from its superior cash flow.

Currently, Gilead Sciences has around 90% of hepatitis C (HCV) market share, which is a testament to the efficacy of its trio of Food and Drug Administration-approved therapies, as well as the shortness of treatment compared to prior standards of care. In order for Gilead to be unseated as the go-to therapy in HCV, a drug developer would need to deliver a single-dose option that worked in four or six weeks. While that's not out of the question, Gilead is already working on improvements of its own. With physicians and consumers trusting Gilead's HCV product line, it's likely to remain a cash cow, even with higher gross-to-net discounts given to insurers.

Shareholders are also in line to benefit from the $15 billion to $18 billion in annual free cash flow that Gilead is capable of producing each year. Gilead is already working on organically fueling its research in HCV, hepatitis B, HIV, and nonalcoholic steatohepatitis, but its cash flow could allow it to go shopping. The last time Gilead made a fairly large purchase was in Nov. 2011 when it landed Pharmasset for $11 billion. This purchase is what transformed Gilead into the HCV powerhouse that it is today. When not angling for mergers and acquisitions, Gilead could also choose to boost its share repurchase program or dividend.

It's an inexpensive stock that's worth your consideration.

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Jazz Pharmaceuticals

Among biotech stocks, only Gilead Sciences is cheaper than Irish-based Jazz Pharmaceuticals (NASDAQ: JAZZ) when it comes to forward P/E. Based on Wall Street's consensus, Jazz is valued at just 11 times next year's profit projections. Best of all, Jazz has lost about a third of its value since Aug. 2015, setting investors up for what could be a bargain in biotech.

There are two factors that make Jazz a particularly attractive stock to own. To begin with, the company's primary focus is on specialty and rare-disease therapies, which ensures that Jazz faces relatively minimal competition and maintains excellent pricing power. Its lead drug Xyrem, a treatment for narcolepsy, accounted for $281 million of its $381 million of its second-quarter sales while growing by 13% year over year. Double-digit growth is nothing unusual for Xyrem, nor has Jazz's ability to pass along price increases for its key drug. Recent strength has also been seen from Defitelio, a hepatic veno-occlusive disease drug whose sales more than doubled from Q2 2015, and Erwinaze, which grew sales by 8% in the latest quarter.

The other aspect of Jazz investors will probably enjoy is that it's based in Ireland. Irish corporate income tax rates are substantially lower than what U.S.-based companies pay, which ultimately means that Jazz gets to keep more of its income. This extra cash could very well be the reason why Jazz Pharmaceuticals acquired Celator Pharmaceuticals for $1.5 billion earlier this year to get ahold of Vyxeos, a treatment for acute myeloid leukemia.

Considering its solid profits and orphan-drug-based product portfolio, Jazz itself remains a potential takeover candidate, too. But as you've seen, that's far from the only reason to consider owning this cheap biotech stock.

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Albany Molecular Research

Finally, contract research and manufacturing company Albany Molecular Research (NASDAQ: AMRI), which provides drug discovery and active pharmaceutical ingredient development for the life sciences industry, is downright inexpensive at just 12 times Wall Street's 2017 profit forecast.

The obvious draw of Albany Molecular Research is the company's rapid growth potential, highlighted by double-digit growth in 2016 from its three main segments: Discovery and Development Services, Active Pharmaceutical Ingredients, and Drug Product Manufacturing. Of particular interest should be the company's API segment, which handles the development of complex ingredients and can supply preclinical subjects and clinical study participants with various doses of medication. As medicine continues to grow more personalized and gene-based therapies grow in focus, the need for Albany Molecular Research's APIs will likely soar. API contract revenue grew 64% year over year during the second quarter.

As has been a bit of a theme with these cheap biotech stocks, Albany Molecular Research is also getting a boost from M&A. In May, the company announced the $358 million cash-and-stock deal to acquire Price European Therapeuticals, which is more commonly referred to as Euticals. The Italian-based Euticals provides custom synthesis and API manufacturing, which helps Albany Molecular expands its own API segment and global reach. Even more so, the combination will result in $13 million to $15 million in cost synergies over the next three years, and it's expected to be immediately accretive to Albany Molecular's adjusted EPS. This isn't the first, and it won't be the last, deal for Albany Molecular Research.

With revenue expected to double between 2015 and 2018, and EBITDA growth likely to drive M&A activity, Albany Molecular Research is a small-cap biotech value stock that could turn some heads.

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Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.

The Motley Fool owns shares of and recommends Gilead Sciences. It also has the following options: short October 2016 $85 calls on Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.