Two High-Upside Pharma Plays

03/18/2011 11:39 am EST

Focus: STOCKS

Hilary Kramer

Editor, GameChanger Stocks

Drugmakers are on the comeback trail, and these two companies—a safer, undervalued big dog and a higher-risk, higher-reward biotech pick—could fetch some nice profits in the next couple of years, says Hilary Kramer, of GameChangers, in this exclusive interview with MoneyShow.com.

You’ve recently written about some health care stocks, and we all know that health care stocks have been barking dogs in the market for the most part. But you’re focusing on some of them that you think have a good opportunity in the future?

Absolutely, Parexel (PRXL) is one.

OK, tell me first, can you give me a theme or something why the group as a whole may advance a little bit?

Ok, it’s really the sub-sectors of health care. If you’re looking at Big Pharma—Eli Lilly, Pfizer, Merck—you want to be careful, especially when you look at the statistics about off-patent [medications], in the next five years 60% of them are at risk.

You mean Lipitor, etc.

Yeah. So we all know the story on Big Pharma, but where is the opportunity? The opportunity is in biotech. We’re finally at the place where we should have been ten years ago, where some of the original ideas that were born in laboratories and in research, are now in phase-two and phase-three trials.

Now phase two and phase three don’t necessarily mean these drugs are going to be developed, only that they’re more advanced and can actually, possibly be developed.

Exactly, but they’re far enough along that the Big Pharma companies that do have plenty of cash can spend that money to buy the next blockbuster—because they don’t have it themselves, and it’s all about a blockbuster, not a next-generation drug.

I read an article in a research publication about Wellbutrin. It’s an antidepressant that has now been used four times over—anti-smoking, weight loss, and so on—and they’re using that same compound. The same with a lot of the weight-loss drugs that have come out—the problem there is it’s fen-phen just being reformulated.

These Bio-Tech companies, some of them have $200 million market caps, some are a billion market cap. Yes, they have no revenue, but if they get approval you could see a $10-billion-plus addressable market.

My question is, how do you pick the winners among them? I mean...don’t you have to be basically a Ph.D. biochemist in order to understand which ones?

Or you have to be an analyst, like myself, who’s in contact with the top researchers in areas like oncology and cardiology in the world. That really will give insight that no one on Wall Street is digging to find.

Yes, you really want a Ph.D. researcher. In many ways I’m the messenger. I will go and collect the data and the information from a number of experts and researchers in labs, then I’ll take that back to my own desk and figure out the financials and the management and try to gauge whether there’s an opportunity here for shareholders to make some real money.

But just an analyst talking about and looking at a story, that’s a very dangerous road to go on.

So, which ones, based on your contacts with these people who really know what’s going on in the industry, which ones do you think have the most promise nowand that are publicly traded and sizable enough for people to invest in?

YM BioSciences (YMI). This is a small-cap stock.

How small?

A $300 million market cap. But they only compete with a company called Molecular Insight (MIPI), also publicly traded, that did a deal with Novartis that could be up to $1 billion but was $156 million payment.

So you take a company like YMI, that has compounds that fight the enzymes that cause inflammation and cancer-related diseases. They’re in phase-two trials with these drugs, and the side effects seem to be much less then they are with their competitor, and it adds up to a potential blockbuster.

So, is this company making money now?

No money right now, but they’re on the road and we already have a comparison.

Now, I do have to look comparatively, that’s why I bring up Insight, where Novartis will pay a billion dollars if they can get through phase-three trials successfully.

Where is the stock trading right now?

We’re now at $2.50 or so on YMI. I have a target—there’s a 25% chance it’s a zero, but there’s a 75% chance we have a $10 stock.

So this is alet's face itthis is a high-risk stock, right? It’s in phase two, it's a $300 million market cap, it’s selling for $2.50. This is only for people who could really afford to lose the money they’re putting in this investment. Right?

That’s right, but you could also be investing in dead money, which are the Big Pharma stories.

Yeah, but you get a dividend from the dead money too.

You get a dividend, but you’re not going to be making the big return. For me, it’s about equity, its risk capital; I look at it that way.

I will buy an AAA-rated fixed-income product, or if I really want that dividend, I’ll invest in undervalued real estate that will always kick right back to me. I look to the equity markets to really give me the high octane in my portfolio.

But I just want to say, for people reading this...

Oh, I’m sorry—you have to be extremely careful. It’s a dangerous stock to invest in.

If you want a safer stock, you should invest in TEVA Pharmaceuticals (TEVA) that is at $51 right now, it’s been as high as $64 in the last 14 months. [As of March 17, the stock has fallen to the $48 range, as part of the global sell-off—Editor.]

It’s a stock that's unnecessarily depressed for a number of reasons, including concern about generic competition on their Copaxone, which is their MS drug, as well as concerns about production facilities—and the fact that they’re next door to Egypt and it’s an Israeli-based company.

You could buy TEVA and in the next two to three years you could have $70 and a small dividend, so that’s a great way also to play the market.

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