3 Pharmaceuticals With Strong Potential

Includes: ALNY, SGEN, VRTX
by: FAF Research

I will look into 3 pharmaceutical companies that should outperform large-cap firms in the industry in the long-term. I ran a screen that scans for Pharmaceutical companies that have a solid IBD Ranking and promising pipelines of future drugs. I like to invest in medical stocks that could experience superb growth. In the article I detail Alnylam Pharmaceuticals (NASDAQ:ALNY), Seattle Genetics (NASDAQ:SGEN) and Vertex Pharmaceuticals (NASDAQ:VRTX). These companies show promising growth and a strong pipeline of new drugs. Let's analyze them:

Alnylam Pharmaceuticals: Good alliances are its key advantage

Cost reductions, a considerable pipeline progress, and collaborations with huge industry players have made of Alnylam Pharmaceuticals an outperform rated stock in my view-- even in spite of last quarter's reported loss of $0.15 per share and revenue decrease of 9.4%. Moreover, lower expenses set these results ahead of the consensus estimate by almost 50%.

Although analysts are not crazy about this company (yet), several growth catalysts can be found and have certainly encouraged big hedge funds like BlackRock and T. Rowe Price to invest substantial amounts of money in this firm. The principal reason to believe in Alnylam's growth potential is its intellectual property rights to a Nobel Prize winning technology based on RNA interference. Several deals with large-cap pharmaceuticals like Novartis (NYSE:NVS), Medtronic (NYSE:MDT), and Roche (OTCQX:RHHBY), amongst others, seem to confirm Alnylam's rights over this breakthrough that could treat several untreatable diseases at the time. Furthermore, the joint venture between Alnylam and Isis that formed Regulus Therapeutics, the world's first microRNA company, has proved the potential of this new technology by attaining several strategic alliances with large pharmaceuticals.

For instance, an exclusive global alliance with The Medicines Company (NASDAQ:MDCO) will help the firm develop and commercialize its hypercholesterolemia treatment program, while the Ascletis Pharma deal will provide further growth opportunities on the back of the development of a liver cancer treatment for the Chinese people. Moreover, a partnership established with Monstanto (NYSE:MON) to implement biological technologies in the agricultural sector will also help Alnylam diversify its product portfolio and reduce its dependence on the RNA segment.

In fact, the firm's cutting-edge R&D department is probably marking the way to a new way of treating illnesses, inhibiting gene transcriptions instead of merely treating the symptoms. This drug retrieved encouraging phase I results, and phase II studies are bound to conclude any time soon. The management assured that positive results from this study stage should allow the company to continue with phase III development during 2013. I'd say, buy before the stock price rockets.

Seattle Genetics: A company with future growth prospects

Usually, one would not pay attention to a company that presents negative profitability and growth ratios. However, Seattle Genetics deserves a look. The company has spent several years developing monoclonal antibody-based drugs to treat cancer and related diseases and has put together an interesting portfolio of drug candidates. It's attained its first FDA approval for a drug, Adcetris, in 2011 and is already generating an important percentage of the firm's revenue. The compound achieved a 75% response rate in patients with relapsed / refractory Hodgkin's lymphoma (NYSE:HL) and an 86% ratio on anaplastic large cell lymphoma (ALCL) patients. Specifically targeted, the drug admits a high pricing and will most likely drive growth in the upcoming years, with a potential of $1billion in annual sales (Morningstar).

Adcetris' innovative approach to cancer treatment has caught the eye of leading pharmaceutical companies like Millennium, which shares the development costs and will market the drug outside the U.S. in exchange for licensing and milestone payments alongside double-digit royalties on potential sales. Other important companies including Pfizer (NYSE:PFE), Bayer (OTCPK:BAYZF), and GlaxoSmithKline (NYSE:GSK) have pitched in with cash to continue R&D activities and could signify in further royalty and milestone payments adding up to several billion dollars.

Due to the aforementioned reasons, one can look over the poor results in the last reported quarter. Several early-stage drug candidates that could treat Prostate cancer, breast cancer and renal cell carcinoma, amongst others, add potential to future earnings and poise the firm for growth in the long term. Beyond the numbers, which don't look very promising, Seattle Genetics actually does pose as a promise. I'd say, buy before its revenues and stock price rocket. With no debt, plenty of cash available for spending and over 10 companies sponsoring Adcetris´development, it looks like the firm should live up to the expectations of its investors, like Baker Bros, its largest shareholder.

Vertex Pharmaceuticals: An attractive investment opportunity

Another orphan drug pharmaceutical is Vertex, a company that has until now rode on the back of its hepatitis C treatment drug, Incivek. The firm has not only benefited from sales in the U.S., but also from royalties from Janssen Pharmaceuticals -a Johnson & Johnson company (NYSE:JNJ)- and Mitsubishi Tanabe for sales overseas. Despite some worries concerning Gilead (NASDAQ:GILD), a rival firm, developing a more efficient drug, investors are not to worry; the firm's in-house drug development track record is pretty compelling. Currently Vertex is incurring in several trials to diversify its portfolio including a cystic fibrosis drug, Kalydeco, that could actually attack the underlying cause of the disease, unlike existing drugs that only treat the symptoms. Furthermore, this 70,000 people worldwide market should prove more profitable than the Vertex market as cystic fibrosis requires chronic therapy that costs $290,000 per year per patient.

Currently prescribed to only 4% of the cystic fibrosis population, Kalydeco has already contributed with over $171 million in sales and is expected to reach $4 billion in annual revenue once it´s fully approved. Vertex estimates that about 7,000 to 11,500 people worldwide may be treated with Kalydeco.

Invigorated by this development, several important funds including Janus and T.Rowe Price bought considerable amounts of stock lately.

Further encouraging are the firm's returns that reached $32.85 over the past year, offering an ETF of 3.2%. Despite the fact that its stock price substantially escalated in the last past months, this firm still poses as an attractive investment opportunity for the long-term. Not to pass unnoticed, the upsurge in the stock valuation was triggered by the announcement of its Kalydeco and VX-661 drugs (combined) increasing lung capacity in patients.

In last quarter's earnings call, Jeffrey M. Leiden outlined 3 main strategic growth catalysts for the firm: "first, prioritizing our development investments to advance our late-stage medicines (...) second, focus on continuing to create innovative medicines for serious diseases out of our R&D efforts (...) and third, maintaining our financial strength."

Overall, the prospect looks promising for Vertex, especially as it faces no competition in the cystic fibrosis field. I would recommend looking past the high stock price and buying. Returns should be high in the long-term.

Bottom line

With big-cap pharmaceuticals experiencing a down trend, small and medium-cap companies appear like winners in the segment. The above mentioned companies all offer great outlooks with novelty drugs due to be approved and commercialized, generating huge profits. However, I would go for Vertex-- a company that could rocket its revenue in the upcoming quarters.

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.