Following a tumultuous performance year, the biotechnology sector is steadily regaining traction once again, with investors starting to reveal a somewhat bullish sentiment despite having to endure macroeconomic headwinds throughout the first half of the year. 

While there may be some indication that biotech companies are dusting off the dust from the last several months of meager growth, both on their bottom line performance and the stock market - the coming months could help stabilize conditions, as the U.S. Federal Reserve begins to wind down its monetary tightening. 

Investors remain cautious, and there’s a reason that some still hold a fifty-fifty position in biotech companies. Investors are careful not to pull the carriage in front of the horse too quickly, as companies, mostly those in pharmaceuticals and healthcare look to come down from the pandemic high that drove excitement as demand for products and services soared. 

Six Selected Undervalued Biotech Stocks 

Biotechnology remains a somewhat tricky, yet rewarding sector to navigate. 

On the one hand, biotech stocks provide investors with a cushion in the event that the global economy is plunged into a sudden recession. However, this isn’t enough to get excited about, as increased cost of debt, less available cash, and slower consumer spending could hamper the potential of these stocks. 

On top of these risks, the majority of these companies’ innovations are stringently regulated by the necessary authorities, however, new advancements in the field of technology, more so, Artificial Technology (AI) could help bolster biotech companies' innovation opportunities. 

To date, the S&P Biotechnology Select Industry Index is down by 5.03%, however, looking at the index’s performance, beyond the 10-year mark, we begin to see more promising returns, near the range of 7.10%.

With all things on the stock market, biotech is a long-term investment that requires investors to have a strategy that will help to effectively navigate any market-related challenges. 

Halozyme Therapeutics

The San Diego-based biotechnology company, Halozyme Therapeutics (NASDAQ: HALO) had a seemingly bumpy first half of the year, but following more recent indicators, company shares are steadily regaining their foothold, after falling to a new low back in May 2023. 

The company, which designs and develops oncology therapeutic devices, used for the treatment of tumors in microenvironments, recently reported its Q2 2023 earnings and financial performance results. 

Overall, performance remained relatively positive, with year-over-year (YOY) increasing by 45% to more than $221 million. Royalty revenue witnessed similar growth, increasing 31% YOY, and reached a new record of $111.7 million.

During its Q2 2023 earnings, the company announced that it will raise non-GAAP diluted earnings per share (EPS), putting its new guidance in a range of $2.65 - $2.75

On the stock market, year-to-date (YTD) conditions have been somewhat underwhelming, with HALO dropping 23.89%, however, the share price has already gained more than 37% after falling to a low of $30.58 per share in May. 

Following Q2 2023 performance results, investors are beginning to warm up to the prospects of HALO. The company announced that strong increases in product sales were driven by the acquisition of Antares Pharma, which helped significantly improve inventory performance. 

Kiniksa Pharmaceuticals

Kiniksa (NASDAQ: KNSA) provided investors with a seemingly positive performance review following their Q2 2023 earnings results, which significantly helped company shares rise, and begin the long-awaited rebound process. 

The company develops several complex immune-modulating assets used in healthcare, more predominantly in cardiovascular and autoimmune disease treatment. 

Based on their earnings, revenue on ARCALYST, one of their key innovations, and the only FDA-approved therapy treatment for recurrent pericarditis rose by 84% YOY at the midpoint. Total product revenue for ARCALYST remained steady at $54.4 million, with Kinisk further raising revenue guidance to $220 - $230 million for the full year.

A key milestone is perhaps the deployment of their KPL-404 Phase 2 rheumatoid arthritis data, which is expected to be delivered in Q1 2024. KPL-404 is a highly complex concoction that would assist in the treatment of several autoimmune diseases when approved. 

An impressive remark on their recent performance is that the company announced it has an expected operational fund that would last until 2027. This puts the company in a fairly profitable position and further ensures the financial security of its ongoing research and development projects. 

Stocks were relatively stable throughout the later half of the year, however, prices fell sharply in April, with KNSA reaching a price point of $10.44 per share back in April 2023. However, since then, stocks have been moving in an upward trajectory, with performance already up by 24.94 YTD, with August seeing a slight decrease in their trendline, however in more recent weeks, the needle has steadily been trending north once again. 

Acadia Pharmaceuticals

There haven't been many undervalued biotech stocks that have managed to outrun the market such as Acadia Pharmaceuticals (NASDAQ: ACAD). 

Acadia shares have soared this year, rising by more than 75% YTD. In the first six months of the year, ACAD was already up by more than 50%, and throughout much of August, performance has remained steady, with share prices slightly coming up by 4%, before slipping again. 

The California-based company focuses on the development and commercialization of drug treatments for the central nervous system and related disorders. Currently, the company has around two FDA-approved drugs available on the market. 

In terms of financial performance, their balance sheet looks relatively stable, however, new developments in the macro market left the company to face some difficulties.

Overall, revenue for the most recent period, ending June 2023 rose by 22.79%, while net income surged by 103.28% for the same period. 

More recently, the company released its Q2 2023 earnings and performance reports, with both of its headline products, DAYBUE™ (trofinetide) and NUPLAZID® (pimavanserin) witnessing positive sales revenue of $23.2 million and $140 million, respectively. 

During Q2, the company further expanded its efforts, acquiring the global rights to trofinetide, through an agreement with Neuren Pharmaceuticals. This will not only help the company advance the treatment, and research of the drug but help the company to solidify itself as a leader in biotech and pharmaceutical developments. 

Harmony Biosciences

U.S.-based commercial pharmaceutical company Harmony Biosciences (NASDAQ: HRMY) recently received a substantial boost, after the announcement that Barclays, a global financial firm, acquired more than $940,000 worth of HRMY shares. 

The news comes after Barclay's latest Form 13F filing with the Securities and Exchange Commission. The company now owns roughly 28,978 shares of HRMY stock.

There is reason in anything, and for a financial institution such as Barclays to heavily increase their holdings in Harmony Biosciences, is perhaps an indication that while HRMY shares have seen steady declines to date, long-term upside potential could present promising returns for investors. 

More on the company, which develops and distributes therapeutic products for the treatment of rare neurological diseases. Harmony’s flagship product, WAKIX (pitolisant) is a stimulant used by adult consumers who struggle to control daytime drowsiness, and those diagnosed with narcolepsy. 

Based on most recent figures, the company posted positive earnings, for the period ending June 2023, with revenue and net income up by 25.40% and 45.77%, respectively. Total quarterly EBITDA was up by 35.22% to $52.97 million for the same recorded period ending June 2023. 

On the stock market, however, things are looking not so promising as of yet, with HRMY still trying to regain its foothold after dropping nearly 25% in single-day trading back at the end of March 2023. So far, YTD performance is down 39%, and for the first six months of the year, prices were down 29.38%. 

This begs the question, why would an international financial institution, the size of Barclays, increase its holding on Harmony Biosciences, when stock market performance has been steadily on the decline?

The company is perhaps well-positioned, however, further investor research would help deliver more actionable results on where to place HRMY for forward-looking guidance. 

Amphastar Pharmaceuticals

Amphastar (NASDAQ: AMPH) is an American pharmaceutical company that specializes in the development of drugs, more so, injectables, for the treatment of opioid overdose. 

The company experienced a stellar second quarter, largely driven by increased product volumes, following several months of shortages and increased demand. 

For Q2 2023, total net revenue was more than $147 million, which translates into an increase of 18.01% for the period. Total GAAP net income earnings were roughly $26.1 million and represented $0.49 per share. Adjusted non-GAAP net income was $34.8 million, or $0.65 per share. 

The company has a widely diverse portfolio that holds several products, all widely used in the healthcare industry. Another reason for their increased revenue was due to higher profit margins on products such as glucagon and epinephrine, which are commonly used for the treatment of infections and other physiological stresses. 

A look at AMPH stock performance reveals a significant indicator that the company is poised for stellar growth in the coming years, with share performance soaring more than 93% to date. In the first six months of the year, stocks climbed by 67.52%, while the month-over-month period between July and August witnessed stocks falling by just under 11%. 

In more recent weeks, stock prices have started trending upwards again, and investors are becoming bullish over the upside potential of AMPH, especially seeing that the year range for stocks is set at $26.76 - $67.66 per share. 

Incyte Corporation

For a company with a total market capitalization of more than $14 billion, you’d expect to see more investors and Wall Street analysts turning bullish on Incyte (NASDAQ: INCY). 

Since the start of the year, share prices have only declined by 18%, while in the last month, there has already been some indication that INCY could start trending more north, after an increase of 1.08% in share performance between July and August. 

Similar to the other household names on our list, Incyte operates on a global scale, having both North American headquarters located in Delaware and Switzerland. 

Seeing as the company has a global footprint, and a diverse portfolio of pharmaceutical products, recent Q2 2023 earrings and performance reports showed the company cashing in more than $827 million in revenue, which represented a 25% year-over-year improvement. 

Among its most popular products, Jakafi® (ruxolitinib) gained the highest, with more than $682 million in net product revenues for Q2, an increase of 14% YOY. The positive quarter has led the company to raise its full-year guidance to a new range of $2.58 - $2.63 billion for the fiscal full year 2023. 

More than this, the company reported that net product revenues grew by 384% for the most recent quarter compared to Q2 2022, with total product revenue of $80 million. 

Incyte is rapidly expanding its research and development business segment, with a combination of new trials and studies that have been scheduled to conclude in the coming quarter or by the early start of next year. 

The company performs R&D in the field of dermatology and oncology and has established partnerships with several large-cap biotech companies, including Agenus (NASDAQ: AGEN) and Novartis (NYSE: NVS), among others. 

Where challenges lie in the biotech sector 

Overall, there has been some significant growth in smaller pockets of the sector, however, investors continuously rely on the analytical numbers and hard facts that will help them determine their forward-looking strategy. 

For starters, last year biotech companies witnessed a sharp decrease in capital funding flowing from venture capital investors and debt financing. A series of misfortunes, and perhaps necessary macroeconomic turbulence led to an overall decrease in biotech Initial Public Offering (IPO) which decreased by 91% compared to 2021. 

At the same pace, a decline in demand for healthcare products, including vaccines further added insult to injury. Rising debt costs, due to a series of interest rate hikes, were perhaps the tipping point for many smaller biotech firms, with 29% of public companies in the U.S. and European market having less than one year of necessary cash reserves on hand at the time. 

Last year the sector witnessed further declines in merger and acquisition (M&A) activity. Across the industry, roughly $35.6 billion was spent on new M&A ventures. However, this year, prospects are already looking somewhat better, with pharmaceutical and biotech companies spending more than $85 billion on acquisitions during the first five months of the year. 

During the first three months of 2023, Pfizer (NYSE: PFE) announced to settle on an agreed $43 billion in transaction value to inquiry Seagan (NASDAQ: SGEN). By the start of summer, Merck & Co (NYSE: MRK) said that the company is moving full steam ahead with the acquisition of Prometheus Biosciences (NASDAQ: RXDX) in a $10.8 billion deal. 

Unfortunately, a couple of exciting M&A deals won’t help the market completely recover, as further restrictions and new regulatory pressure could rattle any loose nuts and bolts. 

The EY Beyond Border 2023 Biotechnology Report revealed that regulatory pressure, coming from the Federal Trade Commission (FTC) could hamper innovation, and companies’ ability to scale their acquisition ventures. 

What’s more, there have already been concerning remarks following the introduction of the Biden Administration’s Inflation Reduction Act (IRA), which could provide biotech and big pharma companies with a tougher pricing environment. 

The implications following the new framework, largely driven by IRA, would make it harder, and perhaps more stringent for companies in the sector to secure reimbursement for new developments, innovations, and research in the coming years. 

Biotech companies witnessed revenues begin to normalize during the halfway mark of last year, as pandemic-related restrictions began to disappear, and countries reopened their borders to international visitors. The demand for COVID-19 vaccines held steady, but by the end of summer, the rally for vaccines and antiviral treatment began to wane. 

In the coming months, it’s expected that the U.S. government will finish off its vaccine distribution efforts. This would mean that COVID-19 vaccines will now be distributed through private healthcare facilities, as the government’s supply begins to wane, and residents are expected to update their shots with private healthcare providers. 

Producers of COVID vaccines, including Pfizer and Moderna (NASDAQ: MRNA) are both expected to see a sharp fall in COVID-related vaccine revenues. Moderna expects their vaccine revenue to drop from $18.4 billion in 2022, to around $5 billion by the end of 2023. Pfizer estimates that their COVID-19 jab revenue will decrease from the reported $37.8 billion in 2022 to roughly $13.5 billion by the close of the year.

The steady rebound of the sector is not without its challenges. Biotech companies continue to focus on their research and innovation business segment, which could help some of them curtail any potential losses, hopefully, this would further help improve investors sentiment in the coming months. 

Final Thoughts 

There is perhaps long-term upside potential in biotechnology, however, the current market is perhaps more difficult to navigate following the ongoing macroeconomic turbulence and higher interest rate environment. 

A slowdown in venture capital funding last year was perhaps a catalyst that threw the industry into the dark, but the first half of the year has already presented a more promising outlook. 

In general, biotechnology remains a tricky, and perhaps stubborn industry for investors. While it poses a potential shield for investors’ portfolios, in the near term, and during economic downturn, these companies remain sensitive to volatile conditions within the consumer economy. 

Ultimately, investors would need to approach biotech with great caution, but further hold a lukewarm position on some of the most undervalued names in the sector that could help give their portfolios a more diversified boost come the close of the third quarter.