2 Pharma Stocks With Potential Upside Rewards

Includes: BAX, THOR
by: Chandrasekhar Rajagopalan

At least two pharmaceutical stocks have the potential for upside rewards in the near term. One is Baxter International (NYSE:BAX) for having got FDA approval of orphan drug status for the treatment of prophylactic Hemophilia B and the other is Thoratec (NASDAQ:THOR) after its strong Q3 results.

Baxter also struck an exclusive $200 alliance with Brazil-based Hemobras to provide patients with hemophilia with greater access to recombinant factor VIII (rFVII) therapy to treat hemophilia A. Over 10,000 people are living with hemophilia in Brazil. Hemophilia A is a genetic condition that does not produce a sufficient clotting protein.

The partnership allows Baxter to provide recombinant FVIII treatment in the next ten years. Both the companies will work on the technology transfer for the development of local manufacturing by Hemobras. Baxter expects to earn peak sales of over $200 million a year.

Currently, Pfizer's (NYSE:PFE) BeneFIX is the only product available for Hemophilia treatment. The company generated revenues of $693 million in 2011, up from $693 million in 2010. In the third quarter, the drug earned $178 million recording 13% year-over-year growth.

The latest FDA approval came earlier than analyst expected. The earlier approval meant that Baxter's sales growth could accelerate by about 3% - 6% in the 2013-2014. This translates into revenue of $75 - $150 million and EPS of 5 - 10 cents, according to an estimate from Goldman Sachs analyst David Roman.

Commenting on the news, the analyst said, "Overall, the orphan drug designation, the Brazil contract, and underwhelming competitive data (announced on October 31) give us further confidence that Baxter's recombinant franchise (16% of sales/25% of profits) will remain a growth driver (and potentially a source of positive surprise)."

Another pharmaceutical company for potential upside reward is Thoratec. The company delivered higher than expected Q3 results and guided more than the consensus. The company's profit for Q3 increased 28% to $19.0 million from $19.0 million and EPS surged 32.3% to 41 cents from 31 cents last year. On an adjusted basis, profit rose 16.3% to $19.0 million from $19.0 million and EPS grew 19.5% to 49 cents from 41 cents in the last year. Revenues were $$19.0 million, up 15% from $102.6 million in the previous year. Street expected the company to report EPS of 111.79 and revenues of $111.79 million.

The company's Q3 results benefited from strong sales of $19.0, partly offset by weakness in legacy system sales. Analyst David Roman believes that the Q3 results demonstrated ongoing strength in the faster growing Destination Therapy or DT segment of the market. Thoratec will also continue to focus on expanding new centers exclusively for DT. This should further strengthen its share compared to its rival HeartWare.

Meanwhile, the company guided Q4 EPS of $1.40 - $1.44 and adjusted EPS of $19.0 - $1.83 on revenues of $19.0 - $483 million for fiscal 2012. This is well above Street EPS predictions of $111.79 and revenues of $470.94 million.

Interestingly, Goldman Sachs analyst viewed, "3Q2012 results and updated guidance reaffirm our bullish outlook on the company's market share position in its core technology, left ventricular assist devices (LVADs)." He added, "Looking across our coverage, we continue to view Thoratec's LVAD system (especially in the DT market) representing one of the most robust new product cycles in MedTech."

On the headwinds, Thoratec faces negative changes to reimbursement rates, slowing market growth and faster than expected share loss.

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.