3 Beaten-Up Biotech Stocks: Are They Bargains?

By Cory Renauer Markets Fool.com

That's right. Shares of Novavax, Inc. (NASDAQ: NVAX), Rigel Pharmaceuticals, Inc. (NASDAQ: RIGL), and Omeros Corporation (NASDAQ: OMER) suffered market beatdowns recently. Now they're hanging on the clearance rack.

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In fact, they're cheap enough to make any sensible investor wonder if these deals are just too good to be true. To help you avoid falling into a value trap, here's a look at what pushed them down -- and the catalysts that could lift them back up.

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Big opportunity, slim odds

Last September, Novavax, Inc. shares fell off a cliff when its lead candidate failed a pivotal trial, and the stock is still about 84% below its pre-meltdown price.The company's respiratory syncytial virus (RSV) vaccine narrowly succeeded in a similar, mid-stage study with older adults, which is why it had so far to fall in the first place.

Although a slightly higher percentage of patients given the vaccine became infected with RSV than the placebo group, Novavax isn't throwing in the towel just yet. The overall RSV attack rate during the failed study was unusually mild, which may have been a factor. The company is also in the middle of another study to see if administering the vaccine to pregnant women will protect their babies from becoming infected.

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Although healthy adults probably wouldn't miss a day of work with an RSV infection, the virus is the leading cause of infant hospitalizations in the U.S., and the second leading cause of infant mortality worldwide. Investigators have been trying to develop an effective vaccine since the 1960s without success, which suggests that the first one to hit the mark could generate billions in annual sales.

With a recent market cap of just $362 million, success with the maternal immunization trial would send the stock soaring from current levels. Following the late-stage failure in older adults, the odds of success look awfully slim.

After losing $280.0 million last year, its $235.5 million cash cushion doesn't provide much comfort.With a dearth of additional clinical-stage candidates, the company is performing a high-wire act without a safety net. Although there's a narrow chance the stock could provide huge gains, it's hardly worth the risk, which makes this beaten-down biotech stock look more like a value trap than a bargain.

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Altogether, this looks like a winner

Rigel Pharmaceuticals, Inc. stock sank last Octoberwhen it reported a failure in the second of two late-stage trials with its lead candidate, fostamatinib. Although a similar percentage of patients with a platelet-destroying immune disorder responded to the experimental oral treatment as in the first trial, one responder in the placebo group rendered the trial a failure, statistically speaking.

In January, Rigel put results from both trials together, and 29 of 101 patients treated with fostamatinib responded, versus just 1 of 49 patients given a placebo. Statistically speaking, that's a slam-dunk.

Although the FDA generally doesn't accept combined trial results, this is the sort of regulatory hurdle that President Trump and recently appointed FDA commissioner Scott Gottlieb aim to dismantle. Investors won't need to wait much longer to find out if the Agency will bend. The company intends to submit an application based on available data by the end of March.

Existing treatments for the platelet disorder are poorly tolerated, or inconvenient and expensive. A favorable safety profile suggests Rigel's candidate could add about $350 million to its top line with an approval in this indication alone. With an enterprise value of just $270 million, this biotech stock looks like a terrific bargain.

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Eye-opening value

Omeros Corporation's drug that assists surgeons performing cataract surgery and other procedures doesn't grab many headlines, but decisions to finance the development of a robust pipeline with dilutive share offerings have received plenty of negative attention. The company's market cap is about 27% lower now than it was on the day its first drug, Omidria, earned FDA approval nearly three years ago.

Sales of the company's pupil dilator used in cataract and lens-replacement surgeries are still surging. In 2016, product sales bounded 212% over the previous year, to $41.6 million.In the U.S. alone, eye surgeons perform nearly four million procedures each year that could benefit from Omidria. At a list price of $465 per vial, annual sales of this drug could eventually cross the $1 billion line.

A recent market cap of $511 million makes this stock look like a bargain based on Omidria sales alone, but it has four candidates in clinical trials for the treatment of five indications. Investors worried about more share dilution will be glad to know management expects Omidria to generate enough revenue to fund their development. That makes Omeros look like one of the best bargains in biotech that you can buy right now.

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Cory Renauer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.