Will These 3 Biotechs Continue to Rally This Week?

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Last Friday saw a huge rally among biotechs with the SPDR S&P Biotech ending the day up more than 4%. Indeed, many biotechs made major moves to the upside without an apparent catalyst, showing this was a "rising tide lifts all boats" type situation.

While Foolish investors have a long-term outlook, it is important to know if some of the hottest biotechs last Friday will continue their steep rise, or fall back down to Earth. The key issue is whether these sudden moves upwards are due to material catalysts or sectorwide trends.

That said, here is a look at three of the biggest winners in last Friday's rally.

Santarus (UNKNOWN: SNTS.DL  ) shares soared more than 8% last Friday, ending the week up more than 35%. This move was precipitated by Salix Pharmaceuticals (UNKNOWN: SLXP.DL  ) making a $2.6 billion dollar offer to buy the company, which translates into a $32-per-share bid. With this acquisition, Salix will gain Santarus' commercial pipeline consisting of two gastroenterology drugs, two type 2 diabetes drugs and a cholesterol drug. Santarus' drug portfolio has recently seen skyrocketing sales in the third quarter, where revenue jumped 81% to $99 million.

The market cheered Salix's acquisition on Friday by pushing shares up 17% on heavy volume. Why is the market enthusiastic? For starters, this buyout increases Salix's already robust commercial pipeline to 22 FDA-approved products. Secondly, Salix didn't overpay for Santarus. In fact, it appears to have gotten the company on the cheap. The industry average for developing a new drug and bringing it to market is close to $1 billion. And that's typical for a single drug!

Doing some back-of-the-envelope calculations shows that Salix only paid about $520 million for each of Santarus' drugs, all of which are already on the market. This deal is so cheap that some Santarus shareholders have accused management of failing in their fiduciary duty, resulting in a class action lawsuit.

My take is that Salix got the better end of this deal. As such, I look for Salix shares to continue to push higher as the market factors in this acquisition. The upside remaining for Santarus, however, is certainly limited in the time it has left trading as an independent entity. Foolish investors would be wise to look elsewhere in the biotech sector for gains.

Nektar Therapeutics (NASDAQ: NKTR  ) blasted off last Friday ending the week up more than 20% after a strong earnings report beat the Street's expectations. Specifically, the company reported a whopping 231% increase in year-over-year revenue to $60.9 million resulting from increased product sales and a $25 million milestone payment stemming from the filing of naloxegol's European marketing authorization application. While the Street was expecting a $0.25 per share loss, Nektar reported a loss of only $0.14 per share.

Do I think this upward momentum will continue? I believe the answer is "yes." Nektar is a rare bird in the clinical stage biopharma world. The company has nine late-stage drug candidates, most of which are partnered up with big pharmas. I can't recall ever seeing a clinical stage biopharma with that many late stage candidates at one time. On top of that, Nektar just got Cimzia approved in the United States for active psoriactic arthritis last September, and for active ankylosing spondylitis last October . Cimzia's approvals thus brings Nektar's commercial pipeline count up to nine. So there are plenty of reasons to remain bullish on Nektar.

My take is that the company is undervalued with a market cap hovering around $1.2 billion, especially in light of Cimzia's recent approvals. And despite an already strong year-to-date upswing in the stock and the company still operating at a loss, I believe Foolish investors should definitely dig deeper into Nektar.

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Related Tickers

9/23/2016 4:00 PM
NKTR $18.75 Down -0.77 -3.94%
Nektar Therapeutic… CAPS Rating: **
SLXP.DL $0.00 Down +0.00 +0.00%
Salix Pharmaceutic… CAPS Rating: ***
SNTS.DL $0.00 Down +0.00 +0.00%
Santarus CAPS Rating: *****