Healthcare Picks By Drug Type In 2014

 |  Includes: ARNA, BMRN, GILD, TLGT
by: EnhydrisPECorp

After consulting the oracles up on high, I return to you today with my picks in healthcare by drug type. Although they were generally cranky about the recent surge across the sector, they assured me that 2014 still looks bullish, especially for companies that are increasing revenues. They weren't so optimistic about developmental stage companies, however, suggesting that fundamentals will play an actual role in valuations this year. So the theme cutting across the picks below is clear: revenues, revenues, revenues!

As a reminder, I started this six part series outlining my top positions in the sector by market cap, and stocks that might be best left alone this year.

So without further delay, here are my three picks by drug type (generic, orphan, and standard).

The winner in generics will be…

topical generic maker IGI Laboratories (IG). This tiny company isn't flying under the radar, it's in pure stealth mode. Unseen for the most part by healthcare investors, this turnaround story has yielded 183% gains over the last year on anemic volume. I profiled this company awhile back and the next day the stock rose over 14% on one of its only days of unusually high volume.

This story begins and ends with the appointment of Mr. Jason Grenfell-Gardner as CEO in 2012. Under his watch, he has transformed this decade long loser into a rising star in the topical generics space.

Since my last piece, IGI has gone on to sign a licensing and marketing agreement with an undisclosed partner, said to be a major multinational pharmaceutical company. Per the agreement, IGI will receive various milestone payments under the agreement.

What really warrants a closer look into IGI, however, is their large number of ANDA's under review with the FDA. Check out my last piece for more info.

A number of these applications are expected to finally receive word from the FDA this year, which should boost share price, assuming the excruciatingly long wait isn't for naught.

At the time of writing this piece, IGI's market cap is around $180 million. Because revenues are increasing, ANDAs may soon turn into approvals, and more ANDAs are being filed, I have little doubt IGI's market cap won't be in the high $200's come this time next year.

The real question is whether the broader market will finally catch on to this intriguing turnaround story...

Although I don't always like orphan drug makers, when I do it is…

BioMarin (NASDAQ:BMRN). I know, this pick is too obvious, right? BioMarin is a perennial takeover candidate, only to not get taken over. And while it looks grossly overvalued with a market cap of $9.8 billion compared to yearly sales of only $533 million, you need to understand that this is par for the course among orphan drug makers. The real question is whether potential sales of the company's Morquio A drug Vimizim have been factored into the current price. Frankly I don't know.

In my honest opinion, when I look at BioMarin, it looks like a bubble stock riding the orphan drug craze into wonderland. Clinical trial costs outstrip revenues handily, there could be pricing pressure on the horizon for orphan drugs, and BioMarin's shares have risen like a rocket over the past five years.

So let me assure you that I am holding my nose when making this pick.

Why is it my orphan drug pick? Because BioMarin is winning, and will continue to win for the foreseeable future. Its pipeline includes possible blockbusters like a treatment for Pompe disease, among many others. My bet is that someone is going to take the leap of faith this year and buy BioMarin for around $15 billion, a massive premium compared to today's price. Sounds crazy, I know, but this is the wild, wild biotech sector we're talking about.

And for the standard drug pick…

If I could pick Gilead Sciences (NASDAQ:GILD) twice I would. But since I already trumpeted Gilead as my large cap pick, I'll offer another for the standard drug pick.

While I believe Gilead Sciences is going to prove to be the Michael Jordan of the healthcare sector, Arena Pharmaceuticals (NASDAQ:ARNA) is likely to be the sector's Drew Brees. Besides both Arena and Drew Brees having ties to San Diego, they are both underappreciated, hard-working, slow starters that have a knack at proving the naysayers wrong.

In my view, Arena's obesity medication Belviq will generate around $300 million in sales this year, shocking the Street. Right now, shares of Arena are trading at merely six times cash on hand, which is way undervalued for the frothy biotech sector. If you open a stock screener and make some quick comparisons, you'll see that it's not uncommon for stocks in the sector to trade at twenty or even thirty times cash on hand, ahem BioMarin. So Arena's current share price doesn't even factor in its current cash position, and is overly pessimistic about Belviq's prospects.

What investors should keep in mind is the fact that Belviq is slowly but surely gaining traction. If you don't believe me, check out Spencer Osborne's article on the matter. Eventually the floodgates are going to open up in the obesity market, and Arena is well positioned to be a frontrunner in this space. Put simply, I wouldn't be caught short on Arena when the bulls start to run in 2014.

Keeping with the underdog theme, I am picking the Chargers and Saints to win this weekend and advance to the Super Bowl. Sorry, I had to sneak this in.

Disclosure: I am long IG, BMRN, ARNA, GILD. 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.