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Buy This Biotech

Written by Briton Ryle
Posted March 30, 2016

It's been tough sledding for biotech companies.

Starting in late 2011, the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB) was one of the best ETFs out there, rising a little more than 300%...

ibb 5-year

But since July 2015, it's been a pretty consistent move lower for the group. Now, when you see a drop like this, you should start getting interested in the group, especially if the overall stock market has been doing pretty well (which it has). So let's try to get a handle on why biotech stocks have been weak and where the opportunity lies.

There are a few reasons biotech stocks have been weak.

For starters, drug pricing has become a political issue after the whole Martin Shkreli/price gouging thing. It's no secret that drug companies charge more for drugs sold in the U.S. than anywhere else in the world. And there's no really good reason for it, except that there are no regulations to prevent gouging.

In fact, laws are geared to let drug companies charge whatever they want. The fact that drug price regulation has come up in Congress is a negative for the group.

Another reason that biotechs have been weak has to do with liquidity. Biotechs often have to raise money to fund research and development and marketing. But the high-yield bond market is in bad shape right now, making it harder for them to raise money. Biotechs will either have to pay higher rates to borrow or sell stock and dilute valuation. Neither is perceived as a great option.

But of course, neither of these negative catalysts will prevent an up-and-coming biotech company from being successful if it has what it takes to "make it."

On Monday, I recommended one such biotech stock to my Real Income Trader subscribers. And I thought you might be interested in hearing about it...

A Biotech Double in the Making

I've been watching this stock since October 2015, when it fell below $12 a share. It wasn't the drop that piqued my curiosity; it was what happened after. This stock closed at $11.74 on October 22. By November 10, it was above $20. And on December 7, it touched $30.

Yeah, that's a pretty good move...

But then January happened. If you don't recall, it was a massacre right out of the gate in 2016. By mid-January, this stock was back to $20. And by late February, it was under $15. At that point, I was ready to pull the trigger...

rlyp march 2016

The company is Relypsa (NASDAQ: RLYP). On Monday of this week, my Real Income Trader subscribers were buying shares of Relypsa between $12.90 and $13 a share. 

There's always a point where a company's valuation has taken into account whatever negative news is plaguing the stock.

In Relypsa's case, I think that happened Monday. Yes, the company has to raise money to market its newly approved drug, Veltassa. Right now, Relypsa has ~$250 million in cash, and it needs $275–$300 million to market Veltassa in 2016.

So, yes, it needs to raise money. But full-year 2016 revenue is expected to reach around $40 million. And sales are projected to hit $650 million in 2020 — just three and a half years from now. It seems to me that Relypsa may only have to raise cash once to get Veltassa going, and that's a very good thing.

It's Actually Cheap

The other reason I recommended Relypsa has to do with valuation. I will readily admit that biotechs are hard to value. They can burn through cash trying to bring a drug to market, you never really know how successful a drug will be, and there's usually competition.

In Relypsa's case, its drug to treat hyperkalemia, Veltassa, has already gotten approved. (Hyperkalemia is a disease where a person has too much potassium that can cause muscle weakness and heart palpitations. This condition, which affects 3–4 million Americans, is often triggered by other medicines.) It's estimated that hyperkalemia treatment will be a $2 billion annual industry in a few years.

And Relypsa will not face any competition for at least six months, when another hyperkalemia drug from AstraZeneca (NYSE: AZN) may hit the market.

Right now, Relypsa is valued at $600 million. Nearly half of that is cash. And in a few years, revenue will be more than the current market capitalization. Biotechs simply do not trade at 1X revenue. For instance, Gilead (NASDAQ: GILD) trades at nearly 4X revenue. BioMarin (NASDAQ: BMRN) trades at 14X revenue.

It is not unreasonable at all to think that Relypsa can trade at 4X or 5X revenue down the road. At 4X revenue, Relypsa would be $2.5 billion company in 2020, with a stock price around $56 a share...

So bottom line: If Relypsa can even get close to sales projections for Veltassa, it will be much, much higher than it is today. And there are many reasons to believe Relypsa can easily meet sales projections. The drug is very effective, and doctors are prescribing it a lot — the number of prescriptions doubled from January 2016 to February. That kind of traction suggests that the drug is being well received.

Relypsa looks like a pretty good biotech stock to own. My Real Income Trader subscribers got it around $13 on Monday (and the gains in three days have already paid for their subscription fees), and you've got a shot at it around $14.

If you want to learn more about my Real Income Trader service, just check this out this presentation.

Until next time,

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.

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