Is This Beaten-Down Stock a Buy Near Its 52-Week Low?

Penny stocks -- companies with shares trading at around $5 or even less apiece -- usually carry above-average risk. However, there may be hidden gems among them: companies with attractive prospects that continue to be ignored by most investors. Identifying those penny stocks with significant latent upside potential and investing in them before they catch fire can lead to life-changing returns.

That brings us to Iovance Biotherapeutics (NASDAQ: IOVA), a small-cap biotech that has significantly lagged the market over the past year. The stock trades below $2 per share, around its 52-week low. But many, including some Wall Street analysts, think it's deeply undervalued. Should investors take a chance on Iovance?

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Iovance's poor first quarter

One might think things are going well for Iovance Biotherapeutics. Last year, it earned approval for Amtagvi, a medicine for metastatic melanoma (skin cancer). It was a significant regulatory milestone for the company, since it helped demonstrate that Iovance's approach to treating cancer -- one that harnesses the power of patients' own tumor-infiltrating lymphocytes (TILs, white blood cells that can kill cancer cells) -- isn't just a theory.

Since Amtagvi's approval, Iovance has also made decent commercial headway. The company reported $49.3 million in revenue in the first quarter, while the amount it had in the year-ago period was not meaningful. This first-quarter top line might not look too impressive, but the recent update was disappointing for a different reason: Iovance cut its revenue guidance for the year to between $250 million and $300 million. It had previously projected it would record between $450 million and $475 million.

Why the change? Because of the complexity of manufacturing (the process for Amtagvi takes about 34 days) and administering TIL-based therapies, Iovance needs to have specialized authorized treatment centers (ATCs) in which to tend to patients. The more ATCs in its network, the more people it can treat.

Iovance had to revise its guidance because it previously overestimated the growth trajectory of ATC enrollment. Still, the market hates downward guidance revisions, so it's not surprising that the company's shares fell off a cliff following its first-quarter update.

Is the market ignoring the upside potential?

Iovance's consensus analyst estimate (according to Yahoo! Finance) is $19.58, which implies a significant upside from its current levels. Bulls could point to several things that could jolt the share price.

First, even revenue of $275 million (the midpoint of Iovance's guidance for the year) would be impressive for a company that earned approval for its first product last year. (It does market another cancer medicine called Proleukin, which it got through an acquisition, but that only racked up $5.7 million in sales in the first quarter.) Revenue above $200 million for a first full year on the market is competitive for a brand-new medicine. At this rate, Amtagvi could hit blockbuster status within four years as Iovance gets more ATCs activated.

Second, the company is seeking approval for Amtagvi in many other countries and regions, including Canada, Europe, and Australia. That will significantly expand the medicine's addressable market. Considering its fairly successful launch in the U.S., Amtagvi's prospects worldwide make it likely to exceed $2 billion in annual sales at its peak, and that's in this indication alone in treating melanoma.

Third, Iovance will seek label expansions for Amtagvi, so the medicine's potential looks attractive.

That said, Iovance Biotherapeutics is a risky stock, and the recent setback highlights one reason. The process to manufacture and administer Amtagvi, which requires specialized ATCs, increases costs compared to the production and administration of a simple oral pill, or even of subcutaneous injections. So, though Iovance can expand beyond the U.S. market and generate higher revenue, the company will have trouble keeping costs down.

And although Iovance Biotherapeutics is running plenty of studies to earn new indications, clinical setbacks would sink the share price. Even as it hovers near its 52-week low, the stock looks too risky for investors to jump in.

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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Iovance Biotherapeutics. The Motley Fool has a disclosure policy.