2 Pharma Stocks To Consider In The Wake Of An FDA Rejection

|
 |  Includes: PFE, PGNX, SLXP
by: Matt Schilling

When developing a screen, I like to set simple parameters that are based on a company's fundamentals. That said, this screen focuses on two pharmaceutical companies demonstrating at least 15.00% returns on equity (ROE) over the last 12 months, and trading significantly lower as a result of the FDA's recent Complete Response Letter (CRL). Investors who are just starting out should note the following two terms:

-'Return on Equity' is defined as "the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested." In my opinion, screening companies based on ROE acts a stepping stone for a beginning investor.

-An FDA Complete Response Letter was designed under new regulations that govern the drug approval process, FDA's Center for Drug Evaluation and Research (CDER) will no longer issue "approvable" or "not approvable" letters when a drug application is not approved. Instead, CDER will issue a "complete response" letter at the end of the review period to let a drug company know of the agency's decision on the application. "These new regulations will help the FDA adopt a more consistent and neutral way of conveying information to a company when we cannot approve a drug application in its present form," said Janet Woodcock, M.D., director of the agency's Center for Drug Evaluation and Research (CDER).

Salix Pharmaceuticals, Ltd. (SLXP) - trades in a 52-week range of $25.64 (52-week low) and $55.99 (52-week high), opened trading at $45.64/share on Monday after the company was issued a CRL from the FDA with regard to the sNDA for RELISTOR®. There are two variables to consider in terms of SLXP. First the company has demonstrated an ROE of 21.98% over the last 12 months and when compared to that of their competitor Bayer AG (OTCPK:BAYRY), that's nearly 1.53 times that of BAYRY's ROE of 14.30%. The second attractive variable is clearly SLXP's EPS performance over the last four quarters. Surpassing analysts' estimates by an average of 18.73%, the company is expected to earn $0.07/share on revenue of $181.05 million dollars for the June quarter when they announce earnings on August 7th. In my opinion, the FDA's CRL with regard to RELISTOR® isn't going to affect this quarter's earnings report and if recent trends hold true, SLXP could surpass estimates once again.

Progenics Pharmaceuticals, Inc. (PGNX) - trades in a 52-week range of $4.50 (52-week low) and $11.34 (52-week high), opened trading at $6.00/share on Monday after the company was issued a CRL from the FDA with regard to the sNDA for RELISTOR®. There are three variables that I find attractive when it comes to PGNX. First the company has demonstrated an ROE of 43.69% over the last 12 months and when compared to that of their competitor Pfizer (PFE), that's nearly 4.57 times that of BAYRY's ROE of 9.55%. The second attractive variable is the fact the company has zero debt on its books, which could be a very good catalyst moving forward. The last variable to be considered will be the company's upcoming earnings report due out on August 6th. Analysts are expecting PGNX to earn $0.07/share on revenue of $16.21 million dollars for the June quarter. Will the FDA's CRL have any impact on earnings? No it shouldn't, although I'm a bit skeptical as how shares will react post-earnings. If we see a beat of $0.02/share or greater we could see some positive momentum. If PGNX misses by even the slightest of margins the stock may in fact get thrown to the wolves.

Final Analysis

From a growth standpoint, I'd remain very cautious on both companies. The FDA's CRL noted the fact they are requesting additional clinical information from both PGNX and SLXP, even though a timetable for such information has yet to be established. In my opinion, a CRL isn't necessarily a bad thing and it can create a great buying opportunity in both companies since a sell-off generally follows. That said the CRL should be considered a checklist of things that are required before an approval can be granted. We should all keep in mind that RELISTOR® has been approved in both the US and Europe, and that this CRL is really just outlining what needs to happen next. Potential investors looking to establish a position at current levels should do so cautiously and add to that position if and when the sNDA for RELISTOR® gets approved.

Disclosure: I am long PGNX, PFE.