A Small-Cap Pharmaceutical Company With 2014 in Its Sights

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A few months back, Barron's featured an intriguing pharmaceutical company that goes by the name The Medicines Company (NASDAQ: MDCO). This stock is said to have strong catalysts that could lift the share price over the years. The company was at $20.40/share in November 2012 and is now trading at $31.60. The company has reported a 52-week high of $37.40.

The biggest catalyst for a pharmaceutical company is an FDA approval. The Medicines is pending approval for four drugs and the verdict is expected by next year. Would it be worth investing in the company right away or wait it out until next year? Well, let’s find out.

Angiomax has been its trump card so far

Argatroban, Recothrem, Recothrem and company-favorite Angiomax are the four products The Medicines markets. The products focus on a crowd that does not interest other pharmaceutical companies much.

More than 95% of the total revenue generated last year was through the sales of its key product, Angiomax. This product was able to generate $548 million in total revenue last year. The company seems to be investing this money into licensing partnerships and acquisitions to improve its overall drug portfolio.

Partnerships and prospects

A year ago, The Medicines tied-up with AstraZeneca (ADR) (NYSE: AZN) with regards to selling and marketing AstraZeneca’s oral-antiplatelet medicine known as BRILINTA. This four-year tie-up states that The Medicines receives $15 million/year for sales and marketing, plus an extra $5 million/year if it manages to meet or beat its targets.

Last December, The Medicines agreed upon a global licence with Bristol-Myers Squibb (NYSE: BMY) for its product called Recothrom. This is a product that deals with bleeding during surgeries. As per the two-year agreement, The Medicines will be in charge of the supply and Bristol-Myers will take care of the production of the drug. 

With a dividend yield of 3.1%, Bristol-Myers has six compounds in its final stage of FDA approval. Investors should watch out for the cancer treatment drug "Nivolumab." This drug has shown an 80% tumor shrinkage on patients and might be yet another breakthrough drug for the company.

The Medicines was keen on increasing its portfolio and hence went by this strategy. As per the agreement, The Medicines will make a payment of $150 million to Bristol-Myers with the option of acquiring Recothrom assets for an extra $10 million. This arrangement can help improve the EPS of The Medicines, but it wouldn’t help as much for Bristol-Myers.

The Medicines' pipeline

Among the four drugs that are in the final stages of FDA approval is a drug that goes by the name Cangrelor. This drug is an antiplatelet agent that was bought from AstraZeneca a decade ago. At the time of purchase, The Medicines possessed the rights to develop and sell this drug globally, the only exception being specific markets in Asia.

The Medicines is set to grow with AstraZeneca digging the gold

As of now, The Medicines has a market cap of approximately $1.7 billion. The company is valued at 3.1x sales and 35x its trailing earnings. With the absolute valuation at a high, the company’s PEG ratio is only at 0.7.

The Medicines' partner Bristol-Myers is valued at a market cap of $67 billion, 3.8x sales and 35x trailing earnings. AstraZeneca is worth a market cap of $63 billion, 3.8x sales and 10.3x trailing earnings.

AstraZeneca seems to be investing a lot of its resources in its R&D segments. The company has facilities primarily located in Sweden, the United Kingdom and in the United States. With a total cost of around $1.4 billion, the company has relocated 2,500 jobs as part of a restructuring strategy. The effort is set to improve the company’s annual benefits by $190 million and equip the company with state-of- the-art technology.

AstraZeneca and Bristol-Myers have dividend yields of 7.5 % and 3.4%, respectively, whereas The Medicines does not pay a dividend. The opportunity that awaits investors is the moment FDA grants approval of the four drugs that are pending approval for The Medicines. The year 2014 might take this company to new heights if everything does fall in place.

As per reports, the consensus EPS forecast for December 2014 is at $0.94. For December 2016, the EPS forecast is at $5.56. To foresee the future of any pharmaceutical company, inventory plays a key role. The Medicines' inventory was up by 10.4% and revenue dropped by 2.3% this year. Ideally, when inventory increases, revenue should increase. 

For The Medicines, this would suggest that the company does foresee increased in demand in the near future. Inventory divergence is something the company has always adhered to. The Medicines' inventory growth has always outpaced its revenue growth, hence recent results would suggest a positive inventory divergence.

Verdict

The Medicines invested a majority of its capital in partnership deals over the past year. Strategies that involve partnering with bigger companies do suggest that The Medicines would rather pair up with successful companies than compete head to head. These factors suggest that The Medicines is aiming at growth via an improved drug portfolio. 

Positive inventory divergence over the past quarters coupled with partnership deals and pending FDA approvals do suggest a potential major boost to the company's performance in the coming year. It would be safe to say that this stock is worth buying right now. Expect announcements with regards to an improved portfolio as that seems to be the company's priority.

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