We recently compiled a list of the 10 Cheap Biotech Stocks to Invest in Now. In this article, we are going to take a look at where Royalty Pharma plc (NASDAQ:RPRX) stands against the other cheap biotech stocks.
Biotech Stocks Face Uncertainty Despite Interest Rate Cuts
Biotechnology stocks are among the most volatile in the market due to their high risk. The outcomes of FDA clinical trials and the effectiveness of their therapies in the real world might cause significant fluctuations in their pricing. The introduction of COVID-19 vaccinations in 2020 caused the biotech industry to soar to prominence. As Big Pharma started investing in acquisitions, investor interest increased in late 2023 and early 2024. But the momentum faded, and for months, biotech stocks did not move. Few M&A transactions and initial public offerings (IPOs) broke the otherwise quiet period in the second quarter, which saw a steep fall in biopharma deal activity. This slowdown followed a thriving first quarter in which pharmaceutical companies began using their enormous cash reserves for acquisitions.
However, the reaction was unexpectedly subdued, even though the industry expected a drop in the federal interest rate. The Federal Reserve lowered interest rates by half a percentage point earlier in September, which was a bigger drop than anticipated. Although it’s a good step, Mizuho Securities analyst Jared Holz thinks it’s unlikely that there will be a spike in fundraising, M&A transactions, or IPOs. A lot of biotech businesses have canceled programs and made large layoffs to save money in an attempt to survive in volatile markets. Holz thinks it’s hard to gauge the impact, even though the tax drop would inspire some scientific endeavors to be revived. However, the analyst noted that small-cap stocks have experienced “a bit more momentum” since the rate cut, which is encouraging for the biotech industry:
“When I look at biotech, I just view it as a nichey, highly academic kind of component of small-cap equities. If small-cap stocks continue to trade well, biotech will probably do fine. And if not, then maybe there’s a point in which there’s a little bit of stagnation in terms of the index.”
Holz added that the recent rate decline has drawn more attention, but he clarified that the notion that interest rates might forecast the success of biotech companies is still relatively new. Interest rates have minimal impact on biotech equities before 2020. The pandemic changed the environment as investors flocked to the sector and significant sums of money poured into businesses that specialized in medicines.
Biotech Market Poised for Trillion-Dollar Growth Despite High Risks
Precedence Research projects that the worldwide biotech market will reach a valuation of $4.61 trillion by 2034, growing at a compound annual growth rate of 11.5%. Favorable government regulations, more investment, the need for synthetic biology, and a rise in chronic illnesses like cancer, heart disease, and high blood pressure are all predicted to contribute to this growth. The market is expanding as a result of government measures to improve reimbursement policies and update laws. Global drug spending is expected to reach $2.30 trillion by 2028, with a compound annual growth rate (CAGR) of 5% to 8%, according to IQVIA. Treatments for obesity and cancer are anticipated to be the main drivers of this growth, whereas immunology spending may decline as biosimilars become available. By 2028, biotech is expected to reach $892 billion, or 39% of total spending, with cell and gene therapies seeing the fastest rise.
Particularly, the U.S. biotechnology industry was valued at $246.18 billion in 2023 and is expected to increase at a compound annual growth rate (CAGR) of 11.6% from 2024 to 2034 to reach approximately $830.31 billion. North America had a revenue share of 37.79%, while Asia Pacific had a revenue proportion of 23.99%. In 2023, the biopharmacy segment had a 41.73% revenue share by application, while the bioindustry application segment contributed 24.33% of overall revenue.
Despite its potential, investment in biotech startups has several dangers. The industry has a high failure rate, with 90% of initiatives failing and drug development taking more than ten years. Companies that fail to meet clinical trial endpoints or lack sufficient funds before product launch may face bankruptcy. Biotech is often regarded as a “high-risk, high-reward” investment because of its substantial dangers and growth potential. Given this, we will take a look at some of the best cheap biotech stocks.
Our Methodology
For our methodology, we looked up biotech stocks with a PE ratio below 18 and a market cap over 300 million and then ranked these stocks in ascending order based on their P/E ratios as of February 4th, 2025.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A scientist in a laboratory looking through a microscope, surrounded by petri dishes and beakers while researching new biopharmaceutical advances.
Royalty Pharma plc (NASDAQ:RPRX)
P/E Ratio: 12.38
Royalty Pharma plc (NASDAQ:RPRX) plays a major role in supporting new drug development and is the biggest buyer of biopharmaceutical royalties. The company works with many partners, such as universities, research hospitals, non-profits, biotech companies, and big pharmaceutical firms.
Royalty Pharma (NASDAQ:RPRX) makes money from royalties on the sales of top therapies in its portfolio, which includes over 35 approved products and 15 drugs still in development. The company reported solid Q3 2024 results on November 6, with a 15% rise in both Portfolio and Royalty Receipts. In 2024, they spent $2.6 billion acquiring royalties on new therapies. Recent additions include royalties for treatments targeting schizophrenia (Cobenfy), glioma (Voranigo), and ulcerative colitis (Tremfya), which are expected to drive future growth.
Royalty Pharma (NASDAQ:RPRX) has solid financial strength, with $3 billion in available resources. This includes $950 million in cash, ongoing cash flow from its business, and access to loans if needed. The company carries $7.8 billion in debt at a low 3.1% interest rate, with an average repayment period of 12 years to match the lifespan of its royalty investments. Its debt level is about three times its adjusted earnings, and it still has $1.8 billion available through unused credit.
Overall RPRX ranks 6th on our list of the cheap biotech stocks to buy. While we acknowledge the potential of RPRX as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than RPRX but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
