When investors hear the words “undervalued biotech stocks to buy,” they frequently think of companies in the clinical trial stage. That’s understandable. If you can buy a company’s stock before it releases a game-changing drug or therapeutic into the market, you can make a fortune. That line of thinking was displayed in 2020 when many biotech companies raced to produce a Covid-19 vaccine.
But every investor also knows that many of those moonshots never pan out. That’s not the kind of uncertainty you need in this current market. A better option is to look at the companies that already have FDA-approved drugs in the market and a pipeline of potential products on the way. This increases your chance of success.
And the good news is that there are several high-potential biotech stocks. By this, I mean the stocks are trading below the average price-to-earnings of the biotech sector, which is around 19x as of this writing. These stocks also have other catalysts that make them compelling stocks to buy.
Pfizer (NYSE:PFE) remains one of the more polarizing stocks in the biotech sector. And unfortunately for investors, it’s also one of the most beaten-down stocks. Since closing at an all-time high of $59.48 on December 17, 2021, PFE stock is down 37%.
Most of that drop has come in the last 12 months as the company continues to report lower demand for its Covid vaccine Comirnaty. This was evident in the company’s first quarter 2023 earnings report, which showed a sharp year-over-year decline in both revenue and earnings.
However, it’s important to keep looking ahead in the biotech sector. And Pfizer certainly seems to be. It acquired Seagen (NASDAQ:SGEN) in March for $43 billion. This acquisition will allow Pfizer to build on its existing pipeline of oncology drugs. This sector will continue to be one of the largest drivers of revenue growth in the biotech sector. And Pfizer believes Seagen’s pipeline will contribute $10 billion in revenue by 2030.
If that sounds appealing, now is a good time to buy PFE stock. It’s trading at just 7.3x earnings. And even if it takes some time to bring these cancer drugs to market, you’re rewarded with a dividend that currently yields 4.43% and has a sustainable payout ratio of around 32%.
Amgen (NASDAQ:AMGN) is next on this list of undervalued biotech stocks to buy. Growth through acquisition is a common strategy in this sector. So it is that Amgen won a bidding war for Horizon Therapeutics (NASDAQ:HZNP).
The company may have overpaid for Horizon, but it secures Horizon’s pipeline of drugs that Amgen will add to its own stable, including its oncology drug, Enbrel. The company has built a patent thicket around Enbrel that keeps two patents crucial to its pricing power in place for at least five years. And now, the company will begin to benefit from Horizon’s in-market products and its pipeline, which include many late clinical-stage candidates.
AMGN stock is down 17% in 2023, which belies the company’s strong fundamentals, including a free cash flow of $8.8 billion in 2022. Amgen reported $31.6 billion of cash and cash equivalents in the last quarter on its balance sheet. The company also expects to see adjusted earnings per share higher at the midpoint than in 2023.
Plus, at 14.8x earnings, you can buy AMGN stock at a slight discount to the sector. And you get a dividend that currently has a yield of 3.93%.
Gilead Sciences (GILD)
Another biotechnology company pursuing a growth-through-acquisition strategy is Gilead Sciences (NASDAQ:GILD). GILD stock is down 11% for the year, but with a P/E ratio of around 17x, Gilead Sciences appears to be a biotech stock just waiting to explode.
The bullish case can be seen in Gilead Sciences through a wider lens. The stock is up over 16% in the last five years. And of the 30 analyst ratings for GILD stock as of this writing, 12 have a Strong Buy for the stock. That was punctuated when BMO Capital Markets upgraded the stock to an Outperform with a new price target of $100.
Expanding its research deal with Arcus Biosciences (NYSE:RCUS) may put a lid on earnings in the short term. But the two companies have a robust pipeline of oncology treatments. And now, the two companies are partnering to look for treatments for inflammatory diseases.
On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.