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In the never-ending search for potentially undervalued stocks, one indicator is the ratio levered free cash flow/enterprise value. Companies with higher ratios appear more undervalued relative to their levered free cash flows.

Levered free cash flow is the free cash flow after deducting interest payments on outstanding debt. Enterprise value is the sum of the firm’s value from all ownership sources: market cap, outstanding debt, and preferred shares. From this value we subtract cash holdings because, in the event of a takeover, that cash would be used towards the takeover price.

We ran a screen on the biotech industry for stocks with the highest ratios of levered free cash flow to enterprise value, possibly indicating that they are undervalued.

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


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 stocks are undervalued by the market? Use this list as a starting point for your own analysis.

List sorted by levered free cash flow/enterprise value.

1. Cornerstone Therapeutics Inc. (CRTX): Engages in the acquisition, development, and commercialization of branded and generic pharmaceuticals primarily for the respiratory and related markets in the United States. Market cap of $140.25M. Levered free cash flow/enterprise value at 50.97% (enterprise value at 60.25M and levered free cash flow at 30.71M). The stock has had a couple of great days, gaining 9.33% over the last week.

2. ACADIA Pharmaceuticals, Inc. (ACAD): Focuses on drug discovery and clinical development of novel treatments for central nervous system disorders. Market cap of $53.33M. Levered free cash flow/enterprise value at 29.81% (enterprise value at 15.63M and levered free cash flow at 4.66M). This is a risky stock that is significantly more volatile than the overall market (beta = 2.44). The stock has performed poorly over the last month, losing 12.17%.

3. Momenta Pharmaceuticals Inc. (MNTA): A biotechnology company, specializes in the in the characterization and process engineering of complex molecules. Market cap of $849.05M. Levered free cash flow/enterprise value at 19.45% (enterprise value at 514.93M and levered free cash flow at 100.14M). The stock has had a good month, gaining 14.35%.

4. Aastrom Biosciences, Inc. (ASTM): Engages in developing autologous cell therapies for the treatment of severe and chronic cardiovascular diseases. Market cap of $83.46M. Levered free cash flow/enterprise value at 18.01% (enterprise value at 70.06M and levered free cash flow at 12.62M). The stock is a short squeeze candidate, with a short float at 8.05% (equivalent to 11.49 days of average volume). The stock has performed poorly over the last month, losing 18.8%.

5. Medicis Pharmaceutical Corp. (MRX): Engages in the development and marketing of products for the treatment of dermatological and aesthetic conditions in the United States, Canada, and Europe. Market cap of $2.04B. Levered free cash flow/enterprise value at 16.16% (enterprise value at 1.38B and levered free cash flow at 222.98M). The stock has had a couple of great days, gaining 6.76% over the last week.

6. Obagi Medical Products, Inc. (OMPI): Develops and markets topical aesthetic and therapeutic prescription skin care systems. Market cap of $186.93M. Levered free cash flow/enterprise value at 15.95% (enterprise value at 157.53M and levered free cash flow at 25.13M). The stock has lost 7.88% over the last year.

7. Targacept, Inc. (TRGT): Engages in the design, discovery, and development of novel Neuronal Nicotinic Receptors (NNR) Therapeutics for the treatment of diseases and disorders of the central nervous system. Market cap of $249.68M. Levered free cash flow/enterprise value at 14.51% (enterprise value at 43.36M and levered free cash flow at 6.29M). This is a risky stock that is significantly more volatile than the overall market (beta = 3.02). The stock has performed poorly over the last month, losing 61.06%.

8. PDL BioPharma, Inc. (PDLI): Engages in the management of antibody humanization patents and royalty assets, which consist of Queen et al. Market cap of $890.72M. Levered free cash flow/enterprise value at 13.07% (enterprise value at 1.12B and levered free cash flow at 146.42M). The stock is a short squeeze candidate, with a short float at 11.79% (equivalent to 7.75 days of average volume). The stock has gained 17.96% over the last year.

9. ViroPharma Inc. (VPHM): Engages in the development and commercialization of products that address serious diseases with a focus on products used by physician specialists or in hospital settings in the United States and internationally. Market cap of $1.65B. Levered free cash flow/enterprise value at 12.16% (enterprise value at 1.35B and levered free cash flow at 164.20M). The stock is a short squeeze candidate, with a short float at 13.6% (equivalent to 10.43 days of average volume). The stock has had a good month, gaining 12.88%.

10. China Biologic Products, Inc. (CBPO): Engages in the research, development, manufacturing, and sale of plasma-based pharmaceutical products. Market cap of $252.43M. Levered free cash flow/enterprise value at 10.49% (enterprise value at 177.70M and levered free cash flow at 18.64M). The stock is a short squeeze candidate, with a short float at 5.36% (equivalent to 70.68 days of average volume). The stock has had a couple of great days, gaining 35.34% over the last week.

*Levered free cash flow and enterprise value data sourced from Yahoo! Finance, all other data sourced from Finviz.

Source: 10 Biotech Stocks Undervalued By Levered Free Cash Flows