6 Undervalued Biotech Stocks for 2023

6 Undervalued Biotech Stocks for 2023

In the face of the bear market, biotechnology stocks have been performing better than the broader market, but Morningstar analysts say there are still plenty of undervalued stocks in this dynamic industry.

That includes big names such as Moderna MRNA, which was in the spotlight for its coronavirus vaccine, and up-and-comers such as Intellia NTLA.

In 2022, this index lost 9.96% while the stock market fell 18.11% for the same period, as measured by the Morningstar US Market Index. This outperformance came despite biotech’s reputation as a risky area for investors. “Biotech is very speculative,” says Rachel Elfman, healthcare equity analyst at Morningstar. While successful drugs can bring in billions in revenue, that’s far from guaranteed. Fortunes can rise or fall based on a single up or down decision from the U.S. Food and Drug Administration regarding a biotech company’s main product.

But behind biotech stocks’ outperformance has been the defensive nature of healthcare stocks in general: People need healthcare regardless of how the economy is doing.

To find undervalued biotech stocks, we turned to the Morningstar US Biotechnology Index.

Of the 48 biotech stocks in the index, 13 are covered by Morningstar analysts. Of those, eight were undervalued as of Dec. 31, 2022.

Line chart showing performance of biotech stocks vs. the market

What is a Biotech Stock?

The Morningstar US Biotechnology Index comprises stocks from companies involved in research, discovery, development, and the production of innovative drug and drug-related technologies. Genetic and mRNA technologies and vaccines are central to many of these biotech companies, which depend on innovation and the opportunity for growth. Regeneron Pharmaceuticals REGN, Vertex Pharmaceuticals VRTX, and Alnylam Pharmaceuticals ALNY are among the largest biotech companies in this index.

Biotech Stocks to Buy Now

We looked for the most undervalued stocks in the Morningstar US Biotechnology Index that currently have a Morningstar Rating of 4 or 5 stars.

For long-term investors, companies with wide or narrow Morningstar Economic Moat Ratings have historically had better odds of outperforming. But for this screen, we included companies without moat ratings. That’s because moat designations are rarely found in the innovated, research-heavy biotech industry: Morningstar analysts often withhold moat designations until clinical trials or acquisitions are completed.

These were the six most undervalued biotech stocks in the Morningstar US Biotechnology Index as of Jan. 20:

  • Intellia Therapeutics
  • CRISPR Therapeutics CRSP
  • Ionis Pharmaceuticals IONS
  • Moderna
  • Incyte INCY
  • Jazz Pharmaceuticals JAZZ

The most undervalued biotech stock is Intellia, trading at a 61% discount to the fair value estimate set by Morningstar analysts. The least undervalued on the list is Jazz Pharmaceuticals, trading at a 17% discount.

table of undervalued biotech sector stocks

Intellia Therapeutics

  • Fair Value Estimate: $85
  • Morningstar Economic Moat Rating: None

“Intellia Therapeutics is a gene editing company focused on the development of CRISPR/Cas9-based therapeutics. Intellia’s technology platform specializes in Clustered Regularly Interspaced Short Palindromic Repeats (CRISPR)/Cas9, which precisely cuts DNA to disrupt, delete, correct, and insert genes to treat genetically defined diseases. CRISPR/Cas9 has created a new class of medicines, which are well suited for targeting rare diseases or other disorders that are caused by genetic mutations.

“CRISPR/Cas9 works by having CRISPR (pieces of DNA sequences) guide Cas9 (an enzyme that can cut and edit DNA) to edit, alter, or repair genes. Intellia is utilizing this gene knockout approach to remove unwanted proteins using its proprietary lipid nanoparticle delivery system. Intellia has leveraged its expertise in CRISPR/Cas9 gene editing to advance a pipeline of in vivo and ex vivo therapies for diseases with high unmet medical needs.

“We think the company’s proprietary technology has the potential to build blockbusters in rare diseases with limited treatment options available. Intellia currently has no approved drugs and a largely early-stage pipeline, so we refrain from awarding the company an economic moat.”

—Rachel Elfman, equity analyst

CRISPR Therapeutics

  • Fair Value Estimate: $119
  • Morningstar Economic Moat Rating: None

“CRISPR Therapeutics is a gene editing company focused on the development of CRISPR/Cas9-based therapeutics. The company’s proprietary platform specializes in CRISPR/Cas9, which precisely cuts DNA to disrupt, delete, correct, and insert genes to treat genetically defined diseases. CRISPR’s emerging technology has led to a new class of therapies, which are well suited for targeting rare diseases or other disorders that are caused by genetic mutations.

“CRISPR/Cas9 works by having CRISPR (pieces of DNA sequences) guide Cas9 (an enzyme that can cut and edit DNA) to edit, alter, or repair genes. We think the company’s proprietary technology has the potential to build blockbusters in rare diseases with limited treatment options available. CRISPR Therapeutics currently has no approved drugs and a largely early-stage pipeline, so we refrain from awarding the company an economic moat.”

“We think the company’s proprietary technology has the potential to build blockbusters in rare diseases, such as CTX001 for the treatment of sickle cell disease and transfusion-dependent beta-thalassemia. CRISPR Therapeutics currently has no approved drugs and a largely early-stage pipeline, so we refrain from awarding the company a narrow moat. Although the company currently operates without an economic moat, we believe potential success through regulatory approvals for its therapies may push us to consider a narrow moat in the future.”

—Rachel Elfman, equity analyst

Ionis Pharmaceuticals

  • Fair Value Estimate: $62
  • Morningstar Economic Moat Rating: Narrow

“Ionis is a leader in RNA-based therapies, and its spinal muscular atrophy drug Spinraza, marketed by partner Biogen, is the first RNA-based therapy to achieve blockbuster status. The firm’s antisense oligonucleotide, or ASO, technology faces strong competition from RNA interference technology emerging from Alnylam, Arrowhead, and Dicerna, as well as gene editing and gene therapy pipelines at multiple firms. However, Ionis has built a massive pipeline of promising new drugs that are rapidly moving toward the market, securing a narrow moat.

“Ionis’ therapies alter production of a given protein in the body, typically reducing production of a toxic, mutant version. Therefore, Ionis can tackle diseases that are difficult to treat effectively with other methods, as its therapies are targeted (avoiding safety issues with off-target effects of small-molecule drugs), can act inside the cell (unlike antibody therapies), and are reversible (unlike gene therapy). Ionis has a broad pipeline and strong collaboration partners to help usher to market drugs for large indications, requiring large clinical trials and salesforces. Ionis spun out cardiovascular-focused Akcea in 2017 but reacquired full ownership again in 2020, given the advancement and increasing attractiveness of Akcea’s late-stage cardiology pipeline.”

“Our uncertainty rating for Ionis is not materially affected by environmental, social, and governance, or ESG, risks, although we see access to basic services (tied to drug pricing) as the biggest ESG risk that the firm needs to manage. Overall, we see Ionis as less exposed than its peers to U.S. pricing risks, given Spinraza’s low Medicare Part D exposure, strong international sales, and lack of U.S. price increases, although new drug approvals in ATTR amyloidosis, Alzheimer’s disease, and cardiovascular indications could increase Medicare exposure.”

—Karen Andersen, sector strategist

Moderna

  • Fair Value Estimate: $266
  • Morningstar Economic Moat Rating: None

“We continue to think the market underestimates the potential of Moderna’s mRNA technology to address multiple types of diseases in both prevention and treatment. However, we think Moderna is still in the process of building a moat, as multiple other firms could have the technology to compete, and the overall market opportunity remains unclear. We look forward to more early-stage data from Moderna’s rare-disease programs this year, which we think could open up a very broad opportunity, but due to the higher-risk nature of the programs, we currently assume only a 25% probability of approval.

“Moderna plans to file for approval of its RSV vaccine in the first half of 2023, putting it potentially third to market behind Pfizer and GSK, which both expect to gain regulatory approval for their own RSV vaccines in the older adult population (over the age of 60) by May. Johnson & Johnson could also compete but has yet to disclose phase 3 data for its own vaccine. Regardless, Moderna stands out as the only mRNA-based vaccine in this wave of potential new vaccines.”

“We assign Moderna a Very High Morningstar Uncertainty Rating, given the potential for rapid changes in the competitive landscape and in the COVID-19 virus itself. Beyond COVID-19, Moderna’s technology is still largely unproved, and competing technologies could prove safer and more effective.”

—Karen Andersen, sector strategist

Incyte

  • Fair Value Estimate: $105
  • Morningstar Economic Moat Rating: Narrow

“We think Incyte has a robust late-stage pipeline focusing primarily on oncology and other autoimmune indications, which provides attractive long-term growth opportunities for the firm. Incyte’s PI3K-delta inhibitor parsaclisib is being combined with Jakafi in pivotal myelofibrosis trials, which could lead to a fixed-dose combination regimen that refreshes this franchise beyond Jakafi’s patent expiration. We see strong potential for a topical version of the active ingredient in Jakafi (ruxolitinib), which was approved in 2021 in atopic dermatitis as Opzelura and is poised to receive approval in vitiligo in 2022.

“Beyond JAK inhibition, the recent approval of lymphoma drug Monjuvi (part of a collaboration with MorphoSys) in 2020 in the U.S. and 2021 in Europe also expands Incyte’s hematology portfolio, and studies are in progress testing the drug in earlier-stage patients. Incyte also received U.S. approval of Pemazyre (pemigatinib) in cholangiocarcinoma in 2020. Incyte received a complete response letter from the U.S. Food and Drug Administration for its PD-1 antibody retifanlimab in 2021 in anal cancer but continues to move forward in broader indications, and several oral PD-L1 programs could also move forward following expected data in 2022.

“Intangible assets around Incyte’s core Jakafi franchise remains the foundation of Incyte’s narrow moat, although additional drug approvals have begun to offer more support and diversification, which helps defend the moat against future patent expirations.”

—Karen Andersen, sector strategist

Jazz Pharmaceuticals

  • Fair Value Estimate: $187
  • Morningstar Economic Moat Rating: None

“Jazz Pharmaceuticals added its leading drug, Xyrem, to its portfolio in 2005 with the acquisition of Orphan Medical for about $123 million. This was a great price for the then newly approved drug, which became a blockbuster. At that point, Xyrem was the only approved treatment for cataplexy (sudden muscle weakness or paralysis) in narcolepsy; it has since garnered additional approvals for excessive daytime sleepiness in patients with narcolepsy. Its strong efficacy has propelled its success in the difficult-to-treat sleep indication, but generic entry is on the horizon, leaving a cloud of uncertainty for the company. Jazz reached a settlement in 2017 with Hikma Pharmaceuticals to not allow generics on the market until January 2023. While Jazz will retain some economic profit from royalties on generic sales and a shared distribution program, we expect its returns to decline following Xyrem’s generic entry.”

“Management has been focused on diversifying its portfolio, with the new drug approvals of Zepzelca (for metastatic small cell lung cancer), Rylaze (for acute lymphoblastic leukemia), and Xywav (for the treatment of cataplexy, EDS, and idiopathic hypersomnia). Strong launches and commercialization efforts for these drugs will be crucial for Jazz to successfully diversify its portfolio.

“Acquiring recently launched drugs has been part of Jazz’s portfolio diversification strategy. Jazz spends relatively little on internal research and development (about 16% of 2021 revenue) compared with biotech peers, which tend to spend around 20% or more of sales on R&D.”

—Rachel Elfman, equity analyst