The Best Drug Stock for 2007: Momenta

The best drug company is probably the one that creates the most innovative, life-saving products. The best drug company stock is the one that gives you the highest returns, right?

That's what I'm thinking in nominating Momenta (Nasdaq: MNTA  ) as the best drug company stock of 2007. Naturally, by shooting for high returns, I risk being very very wrong. After all, this company has no products, no profits, nor even any revenues to speak of. So convincing you that this company deserves your investment dollar isn't a matter of running some choice numbers by you. This is a story of technology and trial lawyers.

What does Momenta do?
Momenta is what you might call a biogenerics company -- an industry niche that barely exists today, but will be a big deal in the not-so-distant future. Complex biotechnology drugs aren't often as easy to duplicate as conventional pills, but to the companies that can pass the technological, regulatory, and legal hurdles, great rewards await.

Momenta, for example, has made a copycat of the Sanofi-Aventis (NYSE: SNY  ) drug Lovenox, a blood thinner that brought in a cool $2.7 billion in 2005 sales and could top $3 billion in 2006. Lots of companies would like to sweep in and take a chunk of that market, but they must first prove that their version of the low-molecular-weight heparin is essentially identical. Since Lovenox is a complex mixture of carbohydrate fragments, that's a tall order -- one that Momenta claims it has tackled, and one that competing generic companies probably can't match with current technology. What's better than a piece of a lucrative generic market? A duopoly, with just one generic competing against a name-brand product. Momenta can grab significant market share while offering only a modest discount.

What's the opportunity?
If all goes well, Momenta's generic Lovenox could be bringing in more than $1 billion in annual revenues within a couple years of an early 2008 launch. Those revenues will be shared 50/50 with its marketing partner Sandoz (the generic division of Novartis (NYSE: NVS  ) , already the de facto biogeneric leader). Tentative approval of the product could come as early as mid-2007. Weigh those kinds of sales against Momenta's $626 million market cap and $432 million enterprise value, and you should begin to see why I predict so much upside here. That doesn't even begin to factor in the rest of the pipeline -- a novel heparin product called M118, a generic version of Teva's (Nasdaq: TEVA  ) multiple sclerosis drug Copaxone (expected to bring in revenues around $1.4 billion in 2006), and two undisclosed but "late-stage" molecules partnered with Sandoz. I'm talking four- or five-bag potential returns from the current price over the next two to three years. You can apply a pretty big discount to that and still have an attractive-looking investment.

If all goes well -- there's the rub. First, there's that list of hurdles I mentioned. Momenta and Sandoz have to get FDA to approve the generic Lovenox, a feat that relies on Momenta's technology satisfying FDA demands of bioequivalence where others have so far failed. (And for Momenta to really succeed, FDA must continue not to approve rival generics).

Also, there's the issue of Sanofi-Aventis' intellectual property, which is the subject of ongoing litigation. In June 2005, a federal court effectively threw out Sanofi's remaining Lovenox patent on summary judgment, saying the company had deliberately misled the patent office. An appeals court subsequently remanded the case back to the district court on procedural grounds, saying Sanofi should at least have its day in court -- which it did, just this past December.

A decision should be coming down in the next few weeks. A loss for Sanofi will be a huge win for Momenta and its shareholders. Affirmation of Sanofi's patent rights will give Lovenox exclusivity through 2012 and certainly hurt Momenta's stock. Even if its big release is delayed a few years, however, Momenta looks like it has the only generic game in town. A setback could be a good opportunity for bargain-hunters.

Make your voice heard
Are you feeling lucky? Step over to CAPS and put an "outperform" rating on Momenta -- and join a community of over 20,000 investors sharing thoughts and opinions thousands of stocks. Or maybe you think one of those hurdles will trip up Momenta's momentum. You can be a CAPS champion with a successful "underperform" call too. Give it a try. Click here to sign up. It's entirely free to do so.

Discover our other Foolish candidates for the best drug stock for 2007.

Momenta is a Motley Fool Rule Breakers pick. Discover more cutting-edge pharmaceutical stocks and other companies with explosive growth potential with a free 30-day trial subscription.

Foolish analyst Karl Thiel owns shares of Momenta, but not that many. The Fool has a disclosure policy.


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