Has Optimer Pharmaceuticals Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Optimer Pharmaceuticals (Nasdaq: OPTR  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Optimer Pharmaceuticals.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

192.6%

Pass

 

1-Year Revenue Growth > 12%

99.3%

Pass

Margins

Gross Margin > 35%

58.4%

Pass

 

Net Margin > 15%

(17.4%)

Fail

Balance Sheet

Debt to Equity < 50%

0%

Pass

 

Current Ratio > 1.3

4.02

Pass

Opportunities

Return on Equity > 15%

(16.7%)

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

5 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

Since we looked at Optimer Pharmaceuticals last year, the company has kept its five-point score. The stock hasn't been so fortunate, dropping nearly 20% over the past year.

Optimer focuses on trying to create medications to fight bacteria. The company is best known for Dificid, its treatment for a form of diarrhea associated with the Clostridium difficile bacterium. Alongside marketing partner Cubist Pharmaceuticals (Nasdaq: CBST  ) , Optimer got approval in the U.S. in mid-2011 and has been trying to ramp up sales ever since.

But Optimer has faced some difficulties recently. Back in April, the board of directors fired the company's board chairman, Michael Chang, as well as its CFO and a vice president because of governance concerns raised by the grant of 1.5 million shares of subsidiary Optimer Biotechnology to Chang.

More crucially, though, Optimer hasn't seen the sales results from Dificid that it has hoped for. Although the company did studies showing Dificid's superiority to ViroPharma's (Nasdaq: VPHM  ) Vancocin, which Eli Lilly (NYSE: LLY  ) developed decades ago, the fact that generic versions of the competing drug are available at much lower cost present a problem for doctors considering Dificid.

Even with those cost concerns, analysts took issue last week with Optimer's recent decision to cut prices on Dificid. Dendreon's (Nasdaq: DNDN  ) sales woes with its high-priced Provenge cancer treatments may suggest that cutting price can be a driver to get doctors to adopt a new drug. Yet given the company's failure to turn revenue into net income even at current prices, a 25% price reduction for hospital customers could threaten margins even if it results in greater sales volume.

For Optimer to improve, it will be essential for it to find a viable strategy for marketing Dificid that produces profitable results. Without that, Optimer will likely never get much closer to perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

While you can certainly make huge gains in biotech and pharmaceutical stocks, the best investing approach is to choose great companies and stick with them for the long term. In our free report "3 Stocks That Will Help You Retire Rich," we name stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

Click here to add Optimer Pharmaceuticals to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Dendreon. Motley Fool newsletter services recommend Cubist Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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