A Biotech Buy Before Earnings

10/14/2011 10:45 am EST

Focus: STOCKS

Nicholas Vardy

Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

As we enter the start of earnings season, it’s time to up your bets on stocks going into what traditionally has been the strongest quarter for the stock market, says Nicholas Vardy of Bull Market Alert.

Among the fast-growing major biotechs announcing earnings in the coming weeks is this week’s recommendation, Connecticut-based Alexion Pharmaceuticals (ALXN). I first recommended this stock back in April. Here’s why I think it is set to do well, again.

Despite the sharp pullback in the markets since early August, health-care stocks have held up very well. ALXN itself has risen steadily on expectations of more approved uses for its only drug on the market, Soliris.

Soliris today is the only drug approved to treat a rare blood disorder called paroxysmal nocturnal hemoglobinuria (PNH). PNH is life-threatening, and the drug can cost a patient $400,000 for full treatment.

But ALXN is also expanding Soliris’ label—that is, the diseases Soliris can be used to treat. On September 26, the US Food and Drug Administration (FDA) approved Soliris’ use to treat a disease called atypical hemolytic uremic syndrome, or aHUS.

The European Committee for Medical Products for Human Use, or CHMP, also recommended that the same indication be extended to Soliris in Europe. Alexion expects final European Union (EU) approval in about two months.

There was further encouraging news for Alexion last month, when Soliris fared well in a mid-stage study which evaluated the drug for another indication. The study involved patients suffering from severe and refractory generalized myasthenia gravis (gMG). Encouraged by the positive results, the company intends to evaluate Soliris for the gMG indication further.

As you would expect with a typical biotech stock, Alexion is all about growth. During recent quarters, year-over-year earnings per share (EPS) has grown 36%, 33%, 32%, 63%, 58%, and 45%. Sales growth in recent quarters has jumped 34%, 43%, 45%, 36%, 38%, 41%, and 48%. 2011 and 2012 annual EPS estimates are for gains of 34% and 39%, respectively.

Alexion will report its financial results for the third quarter on October 20, before the financial markets open. The stock might see a pop, as Alexion has a habit of beating Wall Street expectations, having done so for five straight quarters.

So buy Alexion at market today, and place your stop at $49.50. Having closed Thursday at $67.38, I’m looking for the stock to hit at least $76—about 17% upside from current levels—before taking profits. If you want to play the options, I recommend the February 2012 calls.

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