Why These 2 BioPharma Stocks Soared & Why This 1 Will Soar

David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

For some time, I have been telling healthcare investors to buy into overly discounted drug producers. The market is now transitioning the focus away from downside factors to upside factors, which is nothing more than transitioning away from what has already happened (ie. patent cliffs) to what will happen (ie. pipeline developments). Since companies are valued based on their future earnings growth, it only makes sense then to look at the latter. This is therefore nothing other than a market correction. But has the market had enough of a correction? Below, I review the catalysts.

Pfizer (NYSE: PFE) Still Undervalued

Pfizer has been in the news lately of pharmaceutical nightmares with the exclusivity loss of Lipitor, a leading treatment against high cholesterol. However, as I successfully predicted, it eventually became obvious that the market was factoring too much of this headwind into the stock price and thus overly discounting future growth prospects. This market correction has sent the shares flying ~25% over the last 12 months. At only 2.3x book value versus 4.7x for the industry average, shares still appear to be much too cheap. The return on invested capital may stand at 8.8% (420 bps below the industry average), but, again, I think there are catalysts that will drive even more value creation.

What are they? According to MKM Partners, there aren't many. It has forecasted for only 3 new products over the next five years--the lowest amount compared to peers. But this fails to consider the company's war chest, which carries $23 billion in cash. In late November, the company announced the acquisition of NextWave Pharmaceuticals for $255 million plus $425 million tops in milestone payments. The market reacted favorably to this transaction, which will give one of the world's largest healthcare companies access to a top FDA-approved ADHD drug, Quillivant XR. I believe the company can beat the market just through accretive transactions similar to this one--by opening up drugs of smaller manufacturers to larger patient populations; tremendous revenue synergies can be generated.

And, organic, results have also been strong. Recent data show that Pfizer and Bristol's blood thinner Eliquis reduced risk of vein and lung clots and even death by 81% relative to placebo. Lyrica, a once-daily drug that mitigates pain, met its primary endpoint in a second Phase III trial. The decision to lay off some of its domestic sales reps also is also a strong cost cutting measure in this challenging period. Compared to peers Johnson & Johnson, Merck, Novartis, Roch, and Sanofi, Pfizer is still the only one that is expected to see virtually flat EPS over the next 5 years.

Why Mylan (NASDAQ: MYL), Sanofi (NYSE: SNY) Have Soared

Mylan and Sanofi have also been on a run, gaining 41.3% and 46.2% from the 52-week low and hitting virtually all-time highs. What explains the market bullishness and should we expect it to continue?

There are several reasons why you should be optimistic about Mylan. S&P recently boosted the company's credit rating by out of the junk zone and into BBB-. Moody's followed suit and upgraded the company to Baa3, which is also one above "junk". Sell-side analysts have also been upgrading the stock from a consensus of 1.9 three months ago to 1.7 today on a 1 to 5 scale where "1" is a "buy". This is reflected in, among other things, an improved 2013 outlook for EpiPen sales, which are a 0.3 to 0.15 mg epinephrine injection for treating potentially lethal allergic reactions. Recent quarterly sales were excellent, and this momentum is likely to build off of expectations for accretive takeovers next year. Management has explained that it is looking for those that offer geographical expansion, particularly in emerging markets, and possibly worth over $4 billion. Targets include specialty drugs and topically applied ones. The implementation of a $500 million share buyback in mid-November also communicates management's own bullishness on the stock.

Further, the pipeline is proceeding smoothly. It recently gained FDA approval on its AND application for a generic version of AstraZeneca's hypertension treatment Atacand HCT. In mid-August,  the FDA approved Pioglitazone tablets for glycemci control in type 2 diabetes mellitus patients. Before that, the regulatory agency approved Mylan's Modafinil tablets for treating narcolepsy and obstructive sleep apnea in adult patients and then generic versions of Singulair for treating indoor & outdoor allergies and asthma symptoms. Partnerships with Pfizer in Japanese generic business and Gilead in marketing the latter's HIV medicine in developing countries also allow for educed risk.

Similarly, Sanofi has had solid news. In mid-November, Australia's drug regulator approved relapsing multiple sclerosis drug Aubagio--this followed approval by the FDA. In addition, the company has begun a large Phase III trial for its treatment for high cholesterol, which has caused the market to focus more on the upside. Excellent third quarter sales--5.9% gain in consumer health sales and 3.8% gain in animal health sales--have also assured investors that the existing business is faring just well. Despite the relentless rise, Sanofi trades attractively at 6.8x past earnings and has a rating of 1.5 out of 5 on the Street.

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