Seeking Alpha
What is your profession? ×
Deep value, event-driven, dividend investing, REITs
Profile| Send Message|
( followers)

The biotech sector revolves around two things, FDA decisions and EPS announcements. In this article, I wanted to focus on two companies within the sector that have not only demonstrated strong earnings but due to recent developments, should be considered from a long-term perspective.

Horizon Pharmaceuticals (NASDAQ:HZNP) which is based in Deerfield, Illinois is

a biopharmaceutical company, currently offering DUEXIS for the relief of signs and symptoms of rheumatoid arthritis and osteoarthritis, and to decrease the risk of developing upper gastrointestinal ulcers in patients who are taking ibuprofen for these indications; and LODOTRA/RAYOS for the treatment of moderate to severe active rheumatoid arthritis in adults when accompanied by morning stiffness.

On Tuesday November 13th, the company announced quarterly EPS results of -$0.39/share on revenue of $6.50 million, which is pretty impressive, since analysts were expecting HZNP to post a loss of -$0.68/share on revenue of $4.20 million.

There are two variables, aside from the impressive earnings beat, that potential investors should consider in terms of the company's lead drug Rayos. First and foremost, potential investors should note that the company received approval for lead drug, Rayos, earlier this year. On July 26th, the FDA announced it has approved the drug for use

in an effort to treat a broad range of diseases including rheumatoid arthritis (also known as RA), polymyalgia rheumatica (also known as PMR), psoriatic arthritis (also known as PSA), ankylosing spondylitis (also known as AS), asthma and chronic obstructive pulmonary disease (also known as COPD).

Secondly, there are two key studies behind the approval of Rayos that should also be considered. The first study, the CAPRA-1 trial, demonstrated the overall safety of Rayos. This study was then followed by the CAPRA-2 trial which highlighted the fact that people with moderate to severe RA treated with Rayos experienced a significant improvement in ACR20 response criteria compared to placebo. In my opinion, these studies will act as a strong foundation for any future NDAs Horizon may submit on the basis of the future application of Rayos.

WuXi PharmaTech (NYSE:WX) which is based in Shanghai, China currently

operates as a pharmaceutical, biotechnology, and medical device research and development outsourcing company primarily in the People's Republic of China and the United States. It operates in two segments, Laboratory Services and Manufacturing Services.

On Monday November 12th, the company announced quarterly EPS results of $0.36/share on revenue of $125.80 million, which is pretty impressive, since analysts were expecting WX to earn $0.30/share on revenue of $123.30 million.

When it comes to WuXi's latest quarter, the numbers were certainly quite impressive, but due to the company's mediocre outlook, I'd begin to look beyond the numbers. One of the key catalysts for the company comes in the form of a joint venture with MedImmune, the biological unit of AstraZeneca (NYSE:AZN). According to a press release discussing the pact:

the joint venture will control the development of MEDI-5117 for autoimmune and inflammatory diseases in China, and the two companies will have equal ownership in the joint venture. AstraZeneca / MedImmune will have the option to acquire the full rights to commercialize MEDI5117; otherwise, the joint venture will have the right to commercialize the product.

As a result of the joint venture there are two variables to keep in mind. First, we need to consider is the fact that WuXi will earn revenue based on services it provides to the joint venture and MedImmune will receive various milestone payments as the program reaches specific endpoints. The second variable to consider is the JV's exposure to China. I strongly believe that if approved MEDI-5117 could very compete with and take away Chinese market share from HUMIRA (Abbott Labs lead drug aimed at patients suffering from rheumatoid arthritis). In ABT's last quarterly report, the company noted a slowdown in global sales, and I think that if WuXi and MedImmune can continue to demonstrate strong growth in terms of MEDI-5117 they may in fact be able to make up for the ground lost by Abbott Labs.

Final Analysis

Are there any negative catalysts potential investors should consider before establishing a position in either company? As is the case with any biotech company, potential investors need to keep in mind some of the negative catalysts that go hand-in-hand with both Horizon and WuXi. On one hand, any negative indication by the FDA with regard to Horizon's Rayos or WuXi/MedImmune's MEDI-5117 could result in the sell-off of either stock. On the other hand, weaker than expected earnings at any point over the course of the next 12 months, could also send shares down an unfavorable path.

For potential investors looking to establish a position in either Horizon or WuXi, I'd take a closer look at each company and keep in mind the primary positive and negative catalysts moving forward. As is the case with any speculative biotech play, the slightest hint or indication of negative news with regard to earnings or the FDA, and these stocks could essentially fall from the heavens. If potential investors are looking to scoop up shares based on value, in the wake of a strong quarter, I'd do so with a moderate to medium sized position and keep an eye out for any future developments regarding each company's respected pipelines.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.