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2 Underrated Biotech Stocks to Buy Now

The year 2020 has truly been a roller-coaster ride for the stock market. After falling to extreme lows in mid-March as the coronavirus pandemic took hold, the market reached incredible highs on Nov. 24. The Dow Jones Industrial Average crossed the 30,000 mark for the first time ever, while the S&P 500 (SNPINDEX: ^GSPC) also marked its all-time closing high. However, both indexes retreated on Nov. 25, after the release of worsening U.S. jobless claims data.

In such a volatile market, it is quite difficult to find reasonably safe and high-growth biotech stocks. But there are two names that do fit the bill. Leading rare-disease player Alexion Pharmaceuticals (NASDAQ: ALXN) and neuropsychiatric disorder specialist Intra-Cellular Therapies (NASDAQ: ITCI) are both poised for an upward trajectory in coming months.

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Alexion Pharmaceuticals

Alexion Pharmaceuticals is a rare gem in the biotech industry. The company's focus on rare and ultra-rare diseases means that it is working with a very small patient pool. However, it also means limited competition and significant pricing power for most of Alexion's drugs, because patients have few or no alternative treatments available. The company currently markets five rare-disease drugs: Soliris, Ultomiris, Strensiq, Kanuma, and Andexxa. Alexion also has a rich research pipeline, with over a dozen clinical programs targeting rare diseases in areas such as nephrology, neurology, and cardiovascular and metabolic diseases.

Soliris has been approved by the U.S. Food and Drug Administration (FDA) for three rare diseases: paroxysmal nocturnal hemoglobinuria (PNH, a blood disease in which red blood cells break apart), atypical hemolytic uremic syndrome (aHUS, which causes abnormal blood clots in the kidneys), and generalized myasthenia gravis (gMG, an autoimmune condition). While the drug has long been the major revenue driver for Alexion Pharmaceuticals, it may face competition in the PNH market from Apellis Pharmaceuticals (NASDAQ: APLS) and its late-stage drug candidate, pegcetacoplan, which could be ready by 2021, as well as from Amgen's (NASDAQ: AMGN) biosimilar by 2025.

To reduce the pace of Soliris's revenue erosion, Alexion Pharmaceuticals entered into a settlement with Amgen to delay the launch of the Soliris biosimilar until 2025; it could otherwise have entered the market as early as 2022. Management is also focused on converting Soliris patients to Ultomiris, which also treats PNH and was launched commercially in April 2019.

The efforts are working; in the third quarter, Alexion achieved its target of converting more than 70% of PNH patients on Soliris therapy to Ultomiris across "top markets." The company has also reduced patients' annual cost for Ultomiris -- it's 30% cheaper than Soliris maintenance treatment for the aHUS indication, and management plans to extend this pricing strategy to all future Ultomiris indications. This move will further accelerate conversion of Soliris patients to Ultomiris.

Alexion's strategic success is reflected in its robust financial performance. Despite COVID-19 headwinds, third-quarter revenues and non-GAAP earnings per share are up year over year (YOY) by 26% and 16%, respectively.

Soliris continued its blockbuster run in the third quarter, with revenue up 5% YOY to $1.4 billion. However, Ultomiris was the real juggernaut, reporting a dramatic 222% YoY revenue increase to $289 million in the third quarter. Besides Soliris and Ultomiris, the hypophosphatasia (HPP, a condition involving genetic mutation) drug Strensiq is also emerging as a meaningful revenue driver for the company, further reducing the excessive reliance on Soliris. In the third quarter, Strensiq's revenue was up 23% YOY to $189 million. Alexion ended the third quarter with $2.3 billion cash and $3 billion total debt on its balance sheet. The company has generated free cash flow of $2.1 billion so far this year.

Despite a robust product portfolio, promising drug pipeline, and healthy financials, the company is trading at a forward price-to-earnings (P/E) multiple of just 9.5. This is quite cheap for such a promising and stable stock. Alexion Pharmaceuticals is definitely a good pick for healthcare investors with average risk appetite.

Intra-Cellular Therapies

Intra-Cellular Therapies's lead asset, lumateperone, has demonstrated encouraging results across multiple neuropsychiatric indications. Caplyta (lumateperone capsules) was launched as a schizophrenia treatment in late March 2020, and even though the pandemic has led patients to limit physician visits, the drug saw a fourfold increase in total prescriptions in the third quarter as compared to the second.

A much larger opportunity exists for lumateperone as a treatment for bipolar-related depression, given that almost 11 million Americans suffer from this condition that has only limited FDA-approved treatment options. The company has already reported positive results for the drug as an add-on therapy to the mood stabilizers lithium or valproate for treating major depressive episodes related to bipolar 1 or bipolar 2 disorder. Intra-Cellular Therapies also demonstrated the efficacy of lumateperone as a single-agent treatment for bipolar-related depression in a phase 3 trial. The company is getting ready to submit an application seeking approval from the FDA for lumateperone as a single-agent treatment or add-on therapy for bipolar-related depression, and management expects a decision in the second half of 2021.

Lumateperone caused far fewer side effects than other antipsychotic drugs in clinical programs. A better safety and tolerability profile implies higher treatment compliance, which in turn can lead to improved outcomes. Intra-Cellular Therapies is also studying lumateperone in major depressive disorder, another indication with huge growth potential. Lumateperone could emerge as a blockbuster therapy as early as 2024.

Intra-Cellular Therapies boasts a healthy balance sheet, with more than $723 million in cash and only $29 million in debt on its balance sheet. Assuming an annual cash burn rate of close to $300 million (that's 1.5 times the company's net loss over the past 12 months, to account for increased late-stage research and commercialization expenses), operations should be sustainable until the end of 2022 without any further raising of capital.

Hence, although Intra-Cellular Therapies is excessively dependent on the prospects of lumateperone, the clinical progress of this lead asset and the robust balance sheet make it an attractive proposition for healthcare investors with a slightly above-average risk appetite.

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Manali Bhade has no position in any of the stocks mentioned. The Motley Fool recommends Amgen. The Motley Fool has a disclosure policy.


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