Biotech stocks are susceptible to changes in interest rates, primarily due to the high costs associated with product development. In fact, recent studies show that the average cost of developing a new drug stands at a staggering $2.3 billion.
To manage these substantial costs, biotech companies often turn to loans as a crucial part of their financing strategy. However, the interest on these loans can eat into future free cash flows, making their stocks especially vulnerable to higher rates.
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Although it's unclear when the Federal Reserve will pivot on interest rates, most experts anticipate that the central bank will start to reduce rates at some point in 2024. This event could act as a significant catalyst for biotech equities at large.
Which biotech stocks are the most compelling buys leading up to this potential catalyst? Cytokinetics (CYTK -2.43%) and Viking Therapeutics (VKTX -3.56%) screen as top buys right now. Here's why.
An undervalued muscle disease specialist
Cytokinetics, a company specializing in serious muscle diseases, has recently seen its shares undergo significant turbulence. This volatility is largely due to a positive late-stage readout for its heart drug candidate, Aficamten, and a series of buyout rumors that pushed its stock to an all-time high last January.
However, since hitting this peak, Cytokinetics' shares have lost momentum due to the absence of a formal buyout offer, resulting in a drop of over 20% this year. While day traders have sought other opportunities, this downturn could present a unique opportunity for long-term investors.
Why? Wall Street analysts project that Aficamten has the potential to generate over $3 billion in sales by the middle of the next decade. To contextualize this sales forecast, Cytokinetics currently has a market cap of merely $6.8 billion.
Typically, biotech companies with positive late-stage data trade at three to five times the peak sales projections of their lead product candidates. Given this standard, Cytokinetics shares currently screen as significantly undervalued.
However, there is the risk that Aficamten may experience a slow commercial start. But, as a drug that addresses a significant need in the treatment of patients with hypertrophic cardiomyopathy, there's a higher-than-average chance that this experimental heart drug will eventually reach blockbuster-level sales (exceeding $1 billion) at a minimum.
The bottom line is that Cytokinetics stock could turn out to be an incredible bargain if Aficamten meets Wall Street's high expectations. Consequently, investors with a five- to 10-year horizon may want to consider buying this equity ahead of a potential shift in investor sentiment toward biotech later this year.
Another weight loss contender
Viking Therapeutics, a company specializing in metabolic and endocrine diseases, has experienced a roller-coaster ride in 2024. Owing to positive mid-stage results for its weight loss candidate VK2735, the biotech's shares have surged by over 261% this year.
Yet, there could be more growth ahead for Viking's shares. The primary reason is the enormous commercial potential in the weight loss drug market.
While estimates vary, most analysts believe the prescription weight loss drug market could be worth $120 billion annually by 2031. Viking, with its potentially best-in-class product VK2735, may be well positioned to seize a substantial portion of this market.
What does this mean for investors? Given the high demand for weight loss drugs, there's a reasonable likelihood that Viking could receive a substantial buyout offer before the year ends.
Looking more closely, it's not unrealistic for the company to possibly fetch a tender offer ranging from $15 billion to perhaps $20 billion. To put this into context, Viking currently has a market cap of $7.2 billion.
This price point might seem excessive considering the stock's significant rise this year. However, Viking's shares still appear to be deeply undervalued at the moment.
After all, VK2735 could potentially generate $10 billion in annual revenue, which is a conservative peak sales estimate given the enormous demand for weight loss drugs and VK2735's impressive clinical profile.
All things considered, Viking stock scans as a top buy right now, regardless of how the broader biotech industry performs this year.
