2 Underappreciated Biotech Stocks to Buy in 2018

George Budwell with The Motley Fool defines value stocks as having solid fundamentals but lower valuations than their peers. Over time, these stocks tend to outperform growth stocks. With that in mind, Budwell looks at two biopharma companies that fall into this category that investors should check out.

1. Horizon Pharma

Headquartered in Ireland, Horizon markets 13 drugs through its rare disease, rheumatology and primary care business units. On Dec. 27, the company indicated that the U.S. Food and Drug Administration (FDA) had approved the company’s request to expand its Procysbi (cysteamine bitartrate) delayed-release capsules to include children one year of age and older with nephropathic cystinosis. It was previously approved for adults and children as young as two years.

"Data included in the updated label provide further evidence around the unique role of Procysbi in helping physicians manage young children during one of the most crucial periods for growth," said Craig Langman, lead investigator for the study, head of kidney diseases and the Isaac A. Abt MD professor of kidney diseases, The Ann and Robert H. Lurie Children’s Hospital of Chicago, in a statement.

The company has a price-to-sales ratio of 2.39 and a forward earnings-to-price ratio of 11.32. Budwell said, "Not only is Horizon’s present valuation well below that of most mid-cap drugmakers, but it’s also the absolute lowest within the orphan, or rare diseases, drug space by a wide margin."

For some time, Horizon was emulating Valeant Pharmaceuticals International's serial-acquirer business model. But when Valeant collapsed from huge debt, allegations of insider trading, channel stuffing and controversial pricing, investors became leery. Horizon made a strategic pivot toward rare diseases.

Budwell wrote, "While the company admittedly has some work to do to strengthen its balance sheet after a spate of acquisitions, Horizon nevertheless appears to be grossly undervalued in light of its longer-term growth prospects, and its growing footprint in the high-value orphan drug space."

2. Sanofi

Based in Paris, Sanofi has been struggling for a few years, and currently has a price-to-sales ratio of 2.48. The biggest headwind is the company’s core diabetes franchise, which is facing tough competition and falling profit margins, something all companies with diabetes products are facing. Its clinical pipeline is considered weak among its peer group, making it reliant on external partnerships with Alnylam Pharmaceuticals and Regeneron Pharmaceuticals.

For example, on Dec. 18, 2017, Sanofi and Alnylam announced they had submitted a Marketing Authorization Application (MAA) to the European Medicines Agency (EMA) for patisiran, an investigational RNAi therapeutic to treat adults with hereditary transthyretin-mediated amyloidosis (hATTR amyloidosis).

And the company took a hit when its vaccine for dengue, Dengvaxia, was suspended in the Philippines and other key markets.

Budwell wrote, "Despite all these headwinds, however, Sanofi has made major strides toward becoming a leaner, more efficient company through its restructuring efforts. The drugmaker has also reshaped its clinical pipeline to become a formidable player in immune-oncology, anti-inflammatory disorders, and multiple sclerosis over the course of the next decade. So, with a top dividend that currently sports a sizable yield of 3.81 percent, and an improving fundamental outlook, this unloved French biopharma may be worth owning in 2018."