2 Pharma Companies To Consider During Tuesday's Session

by: Matt Schilling

The pharmaceutical sector is generally one for investors who possess a much larger appetite for risk. That said I wanted to focus on two pharma stocks that have performed fairly well over the last 12 months and meet the following minimum criteria:

  • The Company Must Have A Minimum Profit Margin Of 10.00%
  • The Company Must Have A Minimum Return On Equity Of 14.00%

CellaVision AB (CLVS) - trades in a 52-week range of $11.45 (52-week low) and $27.55 (52-week high), closed trading at $17.70/share on Monday as the company prepares to release earnings on August 8th. CLVS presents potential investors with a good opportunity based on two variables. First the company has demonstrated a pretty good profit margin of 10.86% over the last 12 months, considering industry competitor Threshold Pharmaceuticals (THLD) has been unable to demonstrate even a negative profit margin during that same period. The second variable potential investors should consider is the company's return on equity. Over the last 12 months the company has demonstrated an ROE of 15.18%. If we compare that number to some of the other companies within the industry we'll see that CLVS has a much better ROE than Lorus Therapeutics (LRUSF.PK) which demonstrated an ROE of -1448.47% and Isis Pharmaceuticals, Inc. (ISIS) which demonstrated an ROE of -46.91% during the same 12 month period.

From a developmental prospective CLVS shows very good promise. On July 16th the company announced a joint venture with Array Biopharma (ARRY) for the discovery of novel KIT inhibitor for the treatment of GIST. GIST is a gastrointestinal cancer that currently carries a 5-year or more survival rate in 50 percent of the patients diagnosed each year. It should be noted that GIST affects roughly 12,000 US and EU based patients each year. If both CLVS and ARRY can successfully develop the inhibitor, it will be the first of its kind to treat such a cancer.

Alexion Pharmaceuticals, Inc. (ALXN) - trades in a 52-week range of $46.56 (52-week low) and $109.96 (52-week high), closed trading at $104.59/share on Monday. ALXN presents potential investors with a good opportunity based on three variables. First and foremost, the company has demonstrated a very good profit margin of 20.55% over the last 12 months, and considering how the rest of industry has performed, that's certainly better than some the other major drug companies. For example, companies such as Pfizer (PFE) and Merck (MRK) have demonstrated a profit margin of 14.45% and 13.93% respectively during that period. The second thing to consider is the company's most recent EPS trends spanning the last four quarters. In each of the last quarters ALXN has surpassed estimates by an average of 22.65%, and most recently surpassed June estimates by $0.10/share when they reported earnings on July 25th. Lastly, the company's ROE needs to be considered, and over the last 12 months ALXN has demonstrated a return on equity of 14.46%, which is slightly under that of Amgen (AMGN) which demonstrated an ROE of 17.11% during that timeframe.

As mentioned in the company's most recent quarterly report, the driving force during the second half of 2012 and first half of 2013 is going to be sales of the ALXN's drug Soliris. When company recently raised its outlook it also discussed Soliris noting that, "Alexion has been selling Soliris since 2007 as a treatment for paroxysmal nocturnal hemoglobinuria, or PNH, which causes a breakdown of red blood cells and leads to anemia. In late 2011 regulators in the U.S. and European Union approved the drug as a treatment for atypical hemolytic uremic syndrome, or aHUS, which often leads to kidney failure and death".

Final Analysis

Even though both companies have demonstrated very positive performance over the last six months, the key catalyst is going to be growth. Analysts are estimating CLVS to grow nearly 80.90% percent for the year, and if the company can demonstrate a stronger second half in terms of revenue and earnings they could easily surpass that number. When the company announces earnings on August 8th, potential investors and current shareholders should get a better idea of where the company is headed.

In terms of ALXN, analysts are expecting the company to grow 36.20% which is still a very good clip. As noted in their recent earnings announcement, sales of Soliris are going to play key role for the company moving forward. If they can continue to surpass EPS estimates and demonstrate strong US and European sales during the second half there's absolutely no reason why this stock shouldn't be trading in the mid $120/share range.

Disclosure: I am long PFE, MRK, CLVS, ALXN.