Source: Pharmacyclics

Thanks to FDA approvals and a deep-pocketed partner in Johnson & Johnson (JNJ 0.09%), Pharmacyclics (NASDAQ: PCYC) has been on a roll. After jumping 83% in 2013, the company's share price has climbed another 31% this year. That's an impressive performance, but investors are right to wonder if there's more upside left or if Pharmacyclics shares could tumble from their lofty levels.

First, a bit of backround
Pharmacyclics' main drug is Imbruvica, which won FDA approval as a treatment for mantle cell leukemia, or MCL, last November, and for chronic lymphocytic leukemia, or CLL, earlier this year. While MCL doesn't affect many people, accounting for just 6% of all non-Hodgkin lymphomas, CLL is more common and equally tough to treat. The National Cancer Institute estimates that 15,720 Americans will be diagnosed with CLL this year and that the disease will kill 4,600.

Given the need for new treatment options for CLL, independent monitors halted phase 3 trials of Imbruvica after interim data showed that patients receiving the drug experienced a 78% reduction in risk of disease progression or death. Importantly, the monitors also found that Imbruvica patients had a 57% improvement in overall survival. That led the FDA in February to approve Imbruvica for CLL patients under an accelerated approval pathway. 

Those approvals have triggered milestone payments from Johnson & Johnson, Pharmacyclics' partner on the drug, that are boosting the company's financials. Johnson & Johnson in 2011 signed on to help develop and commercialize Imbruvica, agreeing to pick up 60% of the drug's development costs, pay $150 million up front to Pharmacyclics, and pay another $825 million in milestones tied to development and regulatory milestones. In exchange, J&J receives a 50/50 split of the drug's profit. Exiting the third quarter, Johnson & Johnson had made $585 million in milestone payments to Pharmacyclics, which means $240 million in milestone payments remains under their deal.

Money well spent?
Despite only being on the market for a short time, Imbruvica has already won a foothold among doctors. Between the second and third quarters, the drug's sales grew by 29% to $142 million; that gives it an annualized run rate of $568 million. The third quarter marked the first quarter of net profitability on Imbruvica for Pharmacyclics. Overall, the company's net profit on Imbruvica totaled $15 million, which when combined with milestone payments allowed Pharmacyclics to deliver net income of $41 million, or earnings per share of $0.53.

That's a solid showing, but Pharmacyclics and Johnson & Johnson think it could be the tip of the iceberg given that Imbruvica sales are tracking higher than levels achieved by some blockbuster cancer drugs at this point following their launch.

Source: Pharmacyclics.

That sales pace could quicken over the coming years, too. The companies are evaluating Imbruvica across 53 clinical trials, including 29 investigating the use of Imbruvica alongside other compounds. Those combination trials include therapies from major drug companies including Roche, Bristol-Myers Squibb (BMY 0.32%), and AstraZeneca (AZN 0.74%). All that development activity has analysts expecting that Imbruvica's peak annual sales could total $3 billion or more.

Delivering on potential
Pharmacyclics will need additional wins for Imbruvica in order to hit those optimistic sales targets, but it's off to a good start. In addition to winning U.S. approval in MCL and CLL, it has also notched approval from European Union regulators. The approval of Imbruvica in Europe should increase revenue over the coming year as the drug is launched in different markets.

Additionally, Imbruvica could get the nod for use in another rare B-Cell Lymphoma soon. The company in October filed for accelerated approval of Imbruvica in Waldenstrom's Macroglobulinemia. If approved, that would expand Imbruvica's patient population by another 12,000 people in the United States.

That said, few would argue that Pharmacyclics isn't a massively pricey company. Investors are paying nearly 19 times trailing 12-month sales and 404 times analysts earnings-per-share estimates for next year. To justify that valuation, the company will need to keep executing. After all, Pharmacyclics' $10.4 billion market cap becomes much more palatable if it can deliver on Imbruvica's peak sales forecast of $3 billion. Given that the company has a rock-solid partner in Johnson & Johnson, a lot of potential sales-friendly catalysts, and is sitting on $736 million in cash with no debt, the company could deserve the benefit of the doubt.