3 Most Unbelievably Undervalued Biotech Stocks

By Keith Speights Markets Fool.com

Finding undervalued biotech stocks isn't as easy as it might seem. Many biotechs don't have a product on the market, so any attempt at valuation involves a lot of guesswork about pipeline prospects. And many biotechs that do have products on the market command high premiums.

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However, there still are some great bargains to be found. Here's why Celgene (NASDAQ: CELG), Gilead Sciences (NASDAQ: GILD), and Jazz Pharmaceuticals (NASDAQ: JAZZ) are three of the most unbelievably undervalued biotech stocks around.

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Celgene: A growth engine

Yes, Celgene trades at 42 times trailing 12-month earnings. So how in the world can the biotech be considered undervalued? Forget Celgene's past earnings performance. Instead, look to the future.

Celgene projectsadjusted diluted earnings per share of at least $13 by 2020. That translates to annual earnings-per-share growth of 22% over the next several years. If the biotech can achieve this kind of growth, the current share price is truly inexpensive.The question then is this: Can Celgene grow that quickly? I think it can.

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Revlimid continues to generate over three-fifths of Celgene's revenue. Sales for the blood cancer drug are still growing briskly and should continue to do so with potential additional indications on the way. Celgene also should continue to get solid growth from another blood cancer drug, Pomalyst.

The autoimmune disease market is where much of Celgene's growth will come from, though. Sales for Otezla are expected to keep soaring. The biotech also has several promising pipeline candidates targeting autoimmune diseases, including ozanimod and GED-0301.

Gilead Sciences: Highly underrated prospects

While Celgene has great growth prospects, Gilead Sciences' revenue and earnings have gone down and are expected to keep sliding. But I think the market is way too pessimistic about the big biotech's prospects.

Gilead's stock trades at less than seven times trailing 12-month earnings and less than seven times forward earnings. The dismal outlook for the biotech's hepatitis C virus (HCV) drugs Harvoni and Sovaldi has soured Wall Street's opinion of Gilead. Several clinical setbacks in 2016 didn't help matters.However, I think investors are overly dismissive of Gilead's pipeline and its ability to change the story with a strategic acquisition.

Even though a couple of small biotechs are ahead in the race to develop non-alcoholic steatohepatitis (NASH) drugs, Gilead has three pipeline candidates that could position the company as a major player in the lucrative NASH market in a few years. The big biotech could also elbow its way into the autoimmune disease market with JAK1 inhibitor filgotinib.

John Milligan, Gilead's CEO, has said the company wants to beef up its oncology portfolio through acquisitions. Gilead has a large cash stockpile and solid cash flow to make multiple acquisitions when it chooses to do so. I think the right deal could make investors see Gilead differently -- and realize what a steal the stock is at current prices.

Jazz Pharmaceuticals: A sleeper biotech stock

Like Celgene, Jazz Pharmaceuticals appears more expensive if you look in the rearview mirror. The stock trades at more than 21 times trailing 12-month earnings. However, it's a different story looking to the future. Jazz's current share price is less than 11 times forward earnings.

Much of the company's current growth comes from Xyrem. Sales for the sleep disorder drug jumped 16% year over year in the first three quarters of 2016. Expect Jazz's pipeline to contribute plenty of additional growth for the future.

Jazz anticipates filing for U.S. regulatory approval for Vyxeos in treating high-riskacute myeloid leukemia(AML) in the first quarter of 2017. The company plans to file for European approval for the drug in the second half of the year. Analysts think that Vyxeos, which Jazz gained with its acquisition last year of Celator Pharmaceuticals, could reach peak annual sales of up to $400 million.

The biotech also plans to submit for three other regulatory approvals this year. Jazz should report results from two late-stage clinical studies of JZP-110 in treating excessive sleepiness associated with narcolepsy and for treating excessive sleepiness associated with obstructive sleep apnea (OSA) in the first quarter of 2017. Filings for U.S. regulatory approval for both indications should come later in the year. Jazz also expects to submit for U.S. approval of a new indication for Xyrem in the fourth quarter of 2017.

Risks

Even the best biotech stocks come with risks. Celgene, Gilead, and Jazz could encounter pipeline difficulties. All three could run into regulatory approval hurdles.

Jazz probably faces the biggest risk. The FDA recently approved a generic version of Xyrem. While Jazz thinks that it can head off this challenge in court, there's a possibility that it won't succeed in its efforts.

Celgene, on the other hand, seems the least risky of the three stocks. There don't appear to be any dark clouds on the horizon that should derail the biotech's current products. If I only could pick one of these undervalued biotech stocks, I'd go with Celgene.

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Keith Speights owns shares of Celgene and Gilead Sciences. The Motley Fool owns shares of and recommends Celgene and Gilead Sciences. The Motley Fool has a disclosure policy.