After The Bloodbath, Where Does Pharmacyclics Go From Here?

| About: Pharmacyclics, Inc. (PCYC)

After Pharmacyclics' (NASDAQ:PCYC) earnings report was announced on November 5th, its stock price dropped 19% within a few days. Investors' initial knee- jerk reaction was that a weak quarterly earnings result was responsible for the price drop. However, Pharmacyclics generated revenues of $102.7MM with earnings per share of $1.06. Compared to analysts' consensus revenue of $100MM and an estimated earnings per share range of 0.75-$1.15, Pharmacyclics' results was respectable.

After Pharmacyclics' earnings failed to explain the stock's sell off, headlines published suggested that bad clinical data from Pharmacyclics' multiple myeloma study was responsible for the plunge in the stock price. However, upon closer examination of Pharmacyclics' financial data and partnerships, you will see that Pharmacyclics has been receiving big milestone payments for late stage clinical studies supporting the chronic lymphocytic leukemia (CLL) indication. Big milestone payments have been coming from Janssen Pharmaceuticals, a division of Johnson & Johnson (NYSE:JNJ). The multiple myeloma study thought to be "responsible" for Pharmacyclics stock price tumble is only a phase I dose range study. One cannot possibly believe that the stock slide of 19% was due to an early Phase I study that has minimal impact on Pharmacyclics' current bottom line.

I suspect the primary cause for the stock slide was due to an announcement made by the CEO at the earnings conference. The CEO announced that as of a November 7th, Pharmacyclics' employees can begin exercising their option to sell their stocks. This announcement definitely spooked investors. Currently, Pharmacyclics' employees hold over 20% of the stocks issued. A stock sell off by Pharmacyclics' employees has the net effect of a 20% stock dilution. Investors in panic proactively adjusted the company's stock price in anticipation of a possible "dilution." It is of no coincidence that just prior to the CEO's announcement, Pharmacyclics was trading around $65 and, post announcement, the stock traded at a 20% discount in the low $50's. The current stock price of $50 reflects an anticipated 100 percent employee sell off.

Based on recent Pharmacyclics' stock daily volume traded, it does not appear that a massive employee sell-off is underway as predicted by investors. Therefore, at this time, I believe the stock is oversold. In the near term, I would expect Pharmacyclics' stock price to move into the $60's range as investors begin to calm down. Moving forward, rather than focusing on the possibility of an employee sell off, I would focus on the company's ability to generate revenue by achieving clinical milestones. As long as Pharmacyclics is on track with achieving milestones with its late stage Phase III clinical trials, the price will continue to rise with a potential to reach $80 per share. However, if Pharmacyclics fails to meet clinical milestones, an employee sell off is the least of your problems.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PCYC over 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.

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