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Biotech companies have projects with very long time horizons, sometimes 10 years or more, and because of that some biotech firms operate for years before generating any cash. Therefore, one way to look for more reliable biotech firms is to find those with a history of generating cash.

We used the three-year compound annual growth rate (CAGR) in free operating cash flow to screen for biotech companies that have a history of cash-flow growth. On top of this, we screened for companies with low debt, having EBITDA (earnings before interest, taxes, depreciation, and amortization) last year greater than total debt.

Finally, we searched for companies significantly undervalued relative to the mean analyst target price.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.




Although target price does suffer from upward bias, when stocks are trading at significant discounts to target, it can indicate an undervalued opportunity.

We also created a price-weighted index of the stocks mentioned below, and monitored the performance of the list relative to the S&P 500 index over the last month. To access a complete analysis of this list's recent performance, click here.



Do you think these biotech firms are more reliable? Use this list as a starting-off point for your own analysis.

List sorted by potential upside implied by target price.

1. Emergent BioSolutions, Inc. (EBS):
Biotechnology Industry. Market cap of $757.07M. Three-year CAGR of free operating cash flow at 88.96%. Last year EBITDA at $79.56M vs. total debt at $47.43M. Current price at $21.32 vs. target price at $34.00 (implies a potential upside of 32.90%). It has been a rough couple of days for the stock, losing 5.29% over the last week.

2. Targacept, Inc. (TRGT):
Biotechnology Industry. Market cap of $600.50M. Three-year CAGR of free operating cash flow at 89.32%. Last year EBITDA at $15.11M vs. total debt at $3.06M. Current price at $20.96 vs. target price at $32.00 (implies a potential upside of 27.23%). This is a risky stock that is significantly more volatile than the overall market (beta = 3.08). The stock has lost 3.85% over the last year.

3. Cornerstone Therapeutics Inc. (CRTX): Biotechnology Industry. Market cap of $206.56M. Three-year CAGR of free operating cash flow at 183.26%. Last year EBITDA at $22.67M vs. total debt at $0.23M. Current price at $7.96 vs. target price at $10.50 (implies a potential upside of 9.92%). It has been a rough couple of days for the stock, losing 12.04% over the last week.

4. WuXi PharmaTech (Cayman) Inc. (WX):
Drug Manufacturers Industry. Market cap of $1.20B. Three-year CAGR of free operating cash flow at 46.47%. Last year EBITDA at $100.70M vs. total debt at $37.98M. Current price at $16.92 vs. target price at $21.61 (implies a potential upside of 6.43%). The stock has gained 7.36% over the last year.

*Cash flow, EBITDA, debt, and target price data sourced from Screener.co, all other data sourced from Finviz.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 4 Undervalued Biotech Stocks With Strong Cash-Flow Growth and Low Debt