2 Companies Investors Should Watch A Bit Closer As Analysts Initiate Buy Ratings

 |  Includes: DNDN, OSIR, THLD, VVUS, WINT
by: Matt Schilling

When an analyst initiates or upgrades a stock and that upgrade is accompanied by a recommendation with a long-term positive outlook, the stock in focus can see a considerable increase in its share price within just a few minutes of that note. With that said, I wanted to focus on two healthcare stocks that had their coverage initiated with "BUY" ratings Friday and highlight some of the important variables long-term growth investors should consider before establishing a position.

Discovery Laboratories (DSCO) had its coverage initiated by Stifel Nicolaus who rated the company a "Buy" at current levels and set a $5.00/share price target. The Warrington, Pennsylvania-based firm is a biotechnology company, which focuses on developing products for the treatment of respiratory disease. The company's product pipeline includes Surfaxin, a synthetic, peptide-containing surfactant that has completed Phase-III pivotal trial for the prevention of respiratory distress syndrome (RDS) in premature infants; Surfaxin LS, a lyophilized dosage form of Surfaxin in Phase-III clinical trials, which enhances ease of use for healthcare practitioners; and AEROSURF, a drug-device combination product that has completed first pilot Phase II clinical study of aerosolized KL4 surfactant for the prevention of RDS in premature infants.

There are two catalysts long-term investors should consider when it comes to DSCO. First, the company currently carries a very low total debt to total cash ratio of 0.005, which in my opinion is excellent considering Dendreon Corp. (NASDAQ:DNDN) carries a total debt to total cash ratio of 1.338, which, in my opinion, isn't that great considering the way DNDN burns through cash. The second thing to consider in terms of DSCO is the company's EPS history over the last four quarters, which was highlighted by earnings surprises in the September 2011 quarter and June 2012 quarter, where the company surpassed estimates by 28.6% and 23.8%, respectively. It should also be noted that the company missed estimates during the March 2012 quarter and came in-line with EPS estimates during the December 2011 quarter.

Threshold Pharmaceuticals (NASDAQ:THLD) had its coverage initiated by Stifel Nicolaus who rated the company a "Buy" at current levels and set a $13.00/share price target. The San Francisco, California-based firm is a development stage company, focusing on the discovery and development of drugs for the microenvironment of solid tumors and the bone marrows of hematologic malignancies as novel treatments for patients living with cancer. Its clinical development products include TH-302, a novel drug candidate, which is in Phase I, Phase II, and Phase III clinical trials for the severe hypoxic regions present in various solid tumors and hematologic malignancies. Analysts at Cowen recently noted that if potential shareholders consider the potential of TH-302, THLD is considerably undervalued. That said, I think if the FDA approves TH-302 as a multifaceted drug, we could see THLD surpass not only the $13.00/share price target but easily begin to trade at the $16/share - $18/share level.

When it comes to THLD, there are three things potential investors should consider. First, the development of TH-302 is going to play a key role in the company's overall development in the next 12-24 months. One of the good things behind TH-302 is the fact that the drug could be administered for various reasons, and therefore should be considered to be multifaceted. Second, the company's second quarter earnings were highlighted by the fact that net income increased by $24.9 million (from -$7.9 million to $17 million) and operating losses decreased by $3.9 million (from $6.8 million to $2.9 million) when compared to the year ago quarter. Both the increase in net income and the decrease in operating losses signify, in my opinion, a very good demonstration of growth year over year. Lastly, we should examine the company's estimated quarterly growth for the September 2012 and see how the company fares when compared to other biotech companies. Analysts are expecting THLD to grow 25.00% during the third quarter, which is pretty good considering they expect companies such as Vivus (NASDAQ:VVUS) and Osiris Therapeutics (NASDAQ:OSIR) to demonstrate negative growth of -210.00% and -216.70% for the quarter.

Final Analysis

Potential investors looking to establish a position in either DSCO or THLD should do so with a small- to moderate-sized position and add to that position as both continued drug developments and earnings announcements approach. Although DSCO and THLD have very promising pipelines, I'd not only keep an eye out for drug related announcements but I'd also watch for any positive indication from the FDA.

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.