These 2 Healthcare Stocks Could Win Big With FDA's New 'Breakthrough' Status

| About: Pfizer Inc. (PFE)

By Michael Vodicka

The Food and Drug Administration (FDA) made a groundbreaking policy change last year that is having a large impact on the biotech industry and creating a big opportunity for investors.

To create a faster path to commercialization for potentially life-saving drugs and medicine, the FDA in July introduced a new "breakthrough" status for drugs that show "substantial improvement on existing therapies for clinically significant endpoints."

For an industry that is accustomed to a costly 10-year commercialization process, the breakthrough status is a welcome shift. An accelerated channel to commercialization could enable drug companies to shave years and billions of dollars from the cumbersome process.

But the FDA's new breakthrough status isn't just a win for drug companies and the healthcare industry -- it's also creating an opportunity to invest in the most innovative companies in the world. The companies winning breakthrough status for their drugs are in the hunt for the next billion-dollar blockbuster, something that can send both earnings and shares soaring.

And now, just six months after kicking off, the program is accelerating, with the FDA unleashing a wave of breakthrough designations in the past few months that has the industry buzzing.

That includes Novartis' (NYSE: NVS) LDK378, a next-generation ALK inhibitor that was awarded breakthrough status in March amid Phase II trials. The company said it plans to seek FDA approval next year after only three years of development. That could mean huge savings in time and capital for Novartis.

The FDA's oncology chief, Richard Pazdur, recently emphasized the agency's commitment to the program, stressing that any drug development team working on a breakthrough drug won't have any problem getting steady feedback from the agency and his oncology division.

Looking forward, the FDA's breakthrough program is a great place to find the best companies in healthcare that are developing the most innovative and commercially viable drugs.

Here are two leading healthcare companies that are gaining on recent breakthrough designations.

Pfizer (NYSE: PFE)
Pfizer is one of the largest healthcare companies in the world, with a market cap of $201 billion.

The company is using its massive scale to produce some of the most innovative medical technology in the world, recently earning breakthrough status for a breast-cancer drug called palbociclib. Analysts from JPMorgan Chase and Leerink Swann speculate the drug could generate annual sales of more than $5 billion if approved for use against breast cancer. Pfizer said the special status was awarded based on impressive results in midstage trials. Looking forward, palbociclib will still be subjected to rigorous testing, but its breakthrough status makes the path to commercialization much quicker and less expensive.

Merck (NYSE: MRK)
Merck is another giant in the world of healthcare and medicine, with a market cap of $143 billion. The company grabbed the attention of the oncology community last fall with some upbeat interim data for lambrolizumab, an experimental antibody drug for advanced melanoma. That turned into breakthrough status for the drug in late April, with the FDA acknowledging that the therapy has shown signs of major benefits over current therapies for life-threatening illnesses. Merck has been strong this year, with shares up 15%. However, the company still looks undervalued, trading with a forward price-to-earnings (P/E) ratio of 13.8, a discount to its peer average of 14.5.

Risks to Consider: Although the FDA's breakthrough status is a fast path to commercialization, it is no guarantee of approval. These large blue-chip stocks have many segments and products, diluting the impact of the success or failure of these cancer drugs.

The FDA's breakthrough designation is providing huge benefits to healthcare companies by decreasing the amount of time and capital required to commercialize a prospective drug. Less than a year after the program's launch, the FDA is handing out more breakthrough designations than ever. Pfizer and Merck recently received the designation for two of their most promising drugs, giving them a big leg up on the competition.

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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. I have no business relationship with any company whose stock is mentioned in this article.