In this piece, we will take a look at 12 cheap biotechnology stocks that smart investors are piling into. If you want to skip our introduction to the biotechnology industry and how it might be affected by recent economic and stock market trends, then check out 5 Cheap Biotech Stocks Smart Investors Are Piling Into.
Biotechnology is one of the hottest industries these days and one that has grown in prominence and relevance in the aftermath of the coronavirus pandemic. As a primer, biotechnology refers to the processes and techniques used to develop medicines and drugs from biological raw materials. These helped companies such as Moderna, Inc. (NASDAQ:MRNA) and BioNTech SE (NASDAQ:BNTX) to develop messenger ribonucleic acid (mRNA) vaccines that enabled a reduction in the burden of coronavirus patients that hospitals were facing.
These mRNA vaccines also made headlines in October as the Nobel Assembly decided to award the 2023 Nobel Prize in Physiology and Medicine to researchers who played a crucial role in our understanding of how mRNA vaccines work in the human body. The two latest Nobel Prize winners, researchers Katalin Karikó and Drew Weissman, played a crucial role in mRNA development as they were able to devise an approach that prevents the human body's immune system from attacking the mRNA molecules in a vaccine which prevents it from fighting diseases by enabling the creation of new antibodies.
However, as promising as the biotechnology industry is, the fact still remains that it is one of the most sensitive to high interest rates and a tough economic environment. Before they can be sold to pharmacies or provided to doctors, vaccines and drugs must go through intense research and development which require investing large sums of money with no absolute guarantee of future successful commercialization. Not to mention, higher interest rates aren't helpful to biotechnology stocks either since they increase the discount rate applied to valuation models and make future cash flows less valuable. As an illustration of this fact, consider a biotechnology company that is projected to bring $100 million in free cash flow over the next ten years. In order to gauge the present value of this future money, it is divided by a discount rate which is influenced by interest rates.
If this discount rate is 10%, then the present value of these cash flows is $38.5 million, but if the rate is 20% then the present value drops to $16.2 million. Since a stock price is a reflection of investor expectations of the future, then a high rate environment naturally depresses stocks as firms have to scale up their cash generation in order to meet market expectations during a low rate environment as investors demand more compensation to not park their money in safer investments such as bonds and bank accounts.
Since we're on the topic of interest rates, the close of the first week of October gave a shocker to markets that show that there really is no peace when it comes to being an analyst or an investor. The reason that rates are high right now is that the Federal Reserve is trying to reduce spending in the economy, by both businesses and consumers, to reduce the demand for products and services and bring down inflation. A key barrier that limits the Fed's ability to raise the interest rates is economic strength as too high rates can very well tip the economy into a recession. Therefore, if the economy continues to grow, as it did in the second quarter at a rate of 2.1%, and if the labor market continues to add jobs, then the central bank finds more room to raise rates.
So, about the shocker. A key determinant of the interest rate decisions is the labor market, as when firms hire aggressively, they pay out higher salaries, which then contributes to more discretionary spending cash in the economy. On this front, the month started out with a private payrolls from ADP which showed that private employers added 89,000 new jobs in September for the slowest growth since mid 2021 and nearly half of the estimate provided by Dow Jones economists. For the stock market, this was good news as it suggested that the labor market might be cooling down to provide the Fed room to make a pause. However, data from the Labor Department that measures non farm employment in the United States showed that non farm payrolls grew by a whopping 336,000 in September, which was nearly double what economists had projected.
Amidst this backdrop, we decided to see which biotechnology stocks are cheap and are seeing interest from smart money investors. Some top names are Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX), United Therapeutics Corporation (NASDAQ:UTHR), and Regeneron Pharmaceuticals, Inc. (NASDAQ:REGN).
12 Cheap Biotech Stocks Smart Investors Are Piling Into
To compile our list of the cheap biotechnology stocks that smart investors are buying, we first made a list of the most valuable biotechnology stocks with a price to trailing earnings ratio lesser than 50 and a market capitalization greater than $300 million. This makes them cheaper than the industry trailing P/E average of 113.8. Then, the companies with the highest number of hedge fund investors in Q2 2023 were determined and the top biotechnology stocks are as follows.
Cheap Biotech Stocks Smart Investors Are Piling Into
Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA) is a biotechnology company based in Bermuda that develops treatments for heart diseases and arthritis. The firm's shares are up by 14.75% year to date, and analysts have rated the stock as Strong Buy on average as well as set a $9 share price upside based on the average share price.
By the end of this year's second quarter, 20 out of the 910 hedge funds part of Insider Monkey's database were Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA)'s investors. David Rosen's Rubric Capital Management is the biggest shareholder among these since it owns 3.3 million shares that are worth $47.5 million.
BioNTech SE (NASDAQ:BNTX) was one of the first to develop a vaccine for the coronavirus. It also develops treatments for cancer and other diseases. However, the firm's share price is down by 25% year to date as COVID euphoria surrounding the stock fades. The average share price target is still $50 higher than the current share price.
As of Q2 2023, 21 hedge funds among the 910 tracked by Insider Monkey had held a stake in the company. BioNTech SE (NASDAQ:BNTX)'s largest investor is Jim Simons' Renaissance Technologies through its $48 million stake.
Zymeworks Inc. (NASDAQ:ZYME) is a Canadian biotechnology company with several treatments in different trial phases for cancer, inflammatory diseases, and others. The firm is currently expanding its presence in Dublin, Ireland by opening a new European headquarters.
Insider Monkey dug through 910 hedge funds for their June quarter of 2023 shareholdings and discovered 22 Zymeworks Inc. (NASDAQ:ZYME) investors.
Halozyme Therapeutics, Inc. (NASDAQ:HALO) is an American firm that works with the building blocks of cells, enzymes. The firm's second quarter results saw it grow its royalty revenue by 31% annually and it also scored a win in September when a drug made through its technology was approved in the U.K.
As of June 2023, 25 out of the 910 hedge funds part of Insider Monkey's database had held a stake in the company. Out of these, Halozyme Therapeutics, Inc. (NASDAQ:HALO)s biggest shareholder is Paul Marshall and Ian Wace's Marshall Wace LLP since it owns $83.8 million worth of shares.
POINT Biopharma Global Inc. (NASDAQ:PNT) is an Indiana based biotechnology firm with several cancer treatments in Phase 3 trials. The firm made a big announcement in October when it revealed that the pharma giant Eli Lilly will acquire it to expand its cancer treatment efforts.
Insider Monkey scoured through 910 hedge funds for their second quarter of 2023 shareholdings to find that 25 had bought POINT Biopharma Global Inc. (NASDAQ:PNT)'s shares.
7. Maravai LifeSciences Holdings, Inc. (NASDAQ:MRVI)
Number of Hedge Fund Investors In Q2 2023: 26
P/E Ratio: 16.65
Maravai LifeSciences Holdings, Inc. (NASDAQ:MRVI) is a backend biotechnology company that provides firms with equipment to develop drugs and vaccines. Its shares saw quite a bit of action in July 2023 when rumors suggested that pharma giant Merck is interested in a takeover.
During 2023's June quarter, 36 out of the 910 hedge funds polled by Insider Monkey were the firm's investors. Joel Ramin's 12 West Capital Management is Maravai LifeSciences Holdings, Inc. (NASDAQ:MRVI)'s largest investor through a $41.7 million stake that comes courtesy of 3.3 million shares.
6. Harmony Biosciences Holdings, Inc. (NASDAQ:HRMY)
Number of Hedge Fund Investors In Q2 2023: 29
P/E Ratio: 9.85
Harmony Biosciences Holdings, Inc. (NASDAQ:HRMY) develops treatments for adults with sleeping disorders. The firm is currently seeking to expand its operational portfolio by buying another biotechnology company.
During Q2 2023, 29 out of the 910 hedge funds tracked by Insider Monkey had invested in Harmony Biosciences Holdings, Inc. (NASDAQ:HRMY). Out of these, the biggest stakeholder is Albert Cha and Frank Kung's Vivo Capital due to a $91.7 million stake.
Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX), Harmony Biosciences Holdings, Inc. (NASDAQ:HRMY), United Therapeutics Corporation (NASDAQ:UTHR), and Regeneron Pharmaceuticals, Inc. (NASDAQ:REGN) are some top biotechnology stocks that hedge funds are piling into.
