Should You Be Excited About This Biotech's Earnings?

Anika Therapeutics (NASDAQ: ANIK  )  recently announced its plan to report earnings on Oct. 30. Shares of Anika have seen gains of 190% in 2013, so investors are excited about the prospects of fundamental progress. Should they really be excited, though?

Building momentum with high valuation
In two of Anika's past three quarters, the company's stock has posted significant double-digit stock gains. In February, shares jumped 15% on total revenue growth of 23%.  Then, in August, sales rose just 6%, but gross margin improved from 57.2% to 68.5% year-over-year. Shares of the company soared nearly 30% in part due to this improved efficiency.

These numbers suggest that Anika is a well-run company. It is growing, and is also trading at all-time highs. Anika does not have a blockbuster drug, but rather has a collection of products based on hyaluronic acid, or HA, a naturally occurring polymer naturally produced in the body. HA enhances joint function and also protects, cushions, and lubricates soft tissues. Therefore, Anika has HA-based products used in orthopedics, dermatology, ophthalmology, veterinary sciences, and in surgery. Despite a large number of segments, however, sales in the trailing 12 months are just $73.45 million.

Anika has posted five consecutive years of growth, and most likely will continue to show growth in both the third quarter and upcoming quarters. That growth is not explosive, though; it is low-double-digit or high-single-digit returns. The problem is that Anika is now reaching a valuation to support a more aggressive level of growth, with a market cap of $390 million.

More value and faster growth?
Instead of buying Anika at current levels, investors might find companies such as Questcor Pharmaceuticals (NASDAQ: QCOR  ) and Santarus (NASDAQ: SNTS  ) to be more rewarding.

Questcor Pharmaceuticals markets just one product, Acthar Gel, which is used to treat several different rare conditions. In the last year alone, Questcor has produced revenue of $620 million with growth of more than 60% year-over-year.

Santarus markets five products and has accumulated sales of $293 million over the last 12 months. Moreover, the company has seen growth of nearly 90% year-over-year, which is primarily driven by three of its five products.

Glumetza is its best-selling drug that is used to manage stomach-related side effects associated with type 2 diabetes; it has seen sales growth near 40% year-over-year. Zegerid is an older product, used to treat heartburn caused by acid reflux, but Santarus relaunched it this year after temporarily losing its patent. Finally, Uceris, used for the treatment of mild to moderate ulcerative colitis, is Santarus' most promising drug -- it launched in the first quarter and has produced six-month sales in excess of $20 million.

Valuation matters
Clearly, we are not comparing apples to oranges, as all of these companies have marketed products and are in the biotechnology space. However, each company operates in a different space. What makes Santarus and Questcor so appealing, in my opinion, is growth and valuation.

Anika is currently trading at 22 times next year's earnings, with growth in the high single digits. Questcor and Santarus both have explosive growth, yet trade at 11 and 15 times next year's earnings, respectively.

Moreover, both company's are expected to see continued growth at an aggressive scale. In the case of Anika, it is very difficult to determine when its growth might peak, as most companies don't decline to high-single-digit growth with only $73 million in revenue.

Final thoughts
The key point is that while Anika has performed well for two of its last three quarters, valuation matters in the market. Anika's fundamental growth significantly lags its stock gains. Sooner or later, though, a company's fundamentals and stock performance will align. Anika was cheap last year, but today it is pricey. 

In the case of Santarus and Questcor, while both stocks do have risks associated with them, I've owned both for more than two years. Despite large gains, they seem reasonably valued at just 15 and 11 times next year's earnings, respectively. While Anika's stock performance has outperformed its fundamental growth, Santarus and Questcor's earnings growth exceed that of their stock performance. This makes both attractive in an industry that is loaded with momentum, and both stocks will likely continue to trade higher with long-term fundamental gains. 

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Read/Post Comments (3) | Recommend This Article (3)

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  • Report this Comment On October 23, 2013, at 3:55 PM, WineHouse wrote:

    What a ridiculous article. Anika's price over the past two decades has been a complete roller coaster, and the ups and downs were sometimes for valid reasons and sometimes for "pumpanddump" reasons (pumping-dumping by day-traders and short-sellers can be highly effective for such small companies with such small market caps and stock floats, but has little relevance to underlying value of the company per se). At this point, Anika's products and distribution are starting to develop some "maturity" -- thanks in very large part to the superb marketing work of Depuy-Mitek (a JNJ subsidiary), which is their distributor for their major product, Orthovisc -- and there has been a change inAnika's top management that may bode well for the future as the company "grows" out of its gawky teenager stage. AND IT HAS PIPELINE, and it has a major potential product in clinical trial even as I type this -- Cingal -- which may, if all goes as hoped with the clinical trial outcomes, become the 600-pound gorilla in the field of viscosupplementation for osteoarthritis of the knee. The dramatic rise from 9 to 29 this year is a reflection of all these things, plus some market manipulation by institutional investors.

    Your analysis is not of the company, but rather of a bunch of numbers that may or may not have any relevance to the future earnings of this company.

    As with any micro-cap in a very competitive marketplace (and Anika is in several highly competitive mini-markets, not just the knee viscosupplementation -- take a peek at it's position vis-a-vis viscosupplementation for ophthalmic surgery), short-term and even medium-term stock prices are more a function of trader-gamblers and their moods rather than of the fundamentals.

    If the clinical trials for Cingal come out as hoped (and right now they're still accumulating subjects so it's impossible to know), then the stock price should skyrocket. Will it? Maybe. If the Cingal trials bomb, then the stock price for Anika may bomb as well. Maybe.

  • Report this Comment On October 23, 2013, at 8:52 PM, BrianNichols wrote:

    Valuation must always be considered, and it's for this fact that I purchased shares of ANIK on February 28, 2013 for $12.22 and then sold on 8/2/2013 for $27.10. If you don't believe me then just check my Motley Fool CAPS page where all of my trades are documented for disclosure reasons. I said it was a buy because of valuation, and now it is a sell. Valuation matters

  • Report this Comment On December 04, 2013, at 4:57 PM, raining2009 wrote:

    Now, one and half month have passed since you published your article.

    Could you go back and review your conclusion?

    QCOR go down to earth and ANIK continue shoot to moon.

    Is there something wrong with your reasoning?

    Or your understanding about why a stock rise or fall is totally wrong?

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