Should You Be Excited About This Biotech's Earnings?

Anika Therapeutics recently announced its plan to report earnings on Oct. 30. Shares of Anika have seen gains of 190% in 2013, so investors are excited about the prospects of fundamental progress. Should they really be excited, though?

Building momentum with high valuation
In two of Anika's past three quarters, the company's stock has posted significant double-digit stock gains. In February, shares jumped 15% on total revenue growth of 23%. Then, in August, sales rose just 6%, but gross margin improved from 57.2% to 68.5% year-over-year. Shares of the company soared nearly 30% in part due to this improved efficiency.

These numbers suggest that Anika is a well-run company. It is growing, and is also trading at all-time highs. Anika does not have a blockbuster drug, but rather has a collection of products based on hyaluronic acid, or HA, a naturally occurring polymer naturally produced in the body. HA enhances joint function and also protects, cushions, and lubricates soft tissues. Therefore, Anika has HA-based products used in orthopedics, dermatology, ophthalmology, veterinary sciences, and in surgery. Despite a large number of segments, however, sales in the trailing 12 months are just $73.45 million.

Anika has posted five consecutive years of growth, and most likely will continue to show growth in both the third quarter and upcoming quarters. That growth is not explosive, though; it is low-double-digit or high-single-digit returns. The problem is that Anika is now reaching a valuation to support a more aggressive level of growth, with a market cap of $390 million.

More value and faster growth?
Instead of buying Anika at current levels, investors might find companies such as Questcor Pharmaceuticals and Santarus to be more rewarding.

Questcor Pharmaceuticals markets just one product, Acthar Gel, which is used to treat several different rare conditions. In the last year alone, Questcor has produced revenue of $620 million with growth of more than 60% year-over-year.

Santarus markets five products and has accumulated sales of $293 million over the last 12 months. Moreover, the company has seen growth of nearly 90% year-over-year, which is primarily driven by three of its five products.

Glumetza is its best-selling drug that is used to manage stomach-related side effects associated with type 2 diabetes; it has seen sales growth near 40% year-over-year. Zegerid is an older product, used to treat heartburn caused by acid reflux, but Santarus relaunched it this year after temporarily losing its patent. Finally, Uceris, used for the treatment of mild to moderate ulcerative colitis, is Santarus' most promising drug -- it launched in the first quarter and has produced six-month sales in excess of $20 million.

Valuation matters
Clearly, we are not comparing apples to oranges, as all of these companies have marketed products and are in the biotechnology space. However, each company operates in a different space. What makes Santarus and Questcor so appealing, in my opinion, is growth and valuation.

Anika is currently trading at 22 times next year's earnings, with growth in the high single digits. Questcor and Santarus both have explosive growth, yet trade at 11 and 15 times next year's earnings, respectively.

Moreover, both company's are expected to see continued growth at an aggressive scale. In the case of Anika, it is very difficult to determine when its growth might peak, as most companies don't decline to high-single-digit growth with only $73 million in revenue.

Final thoughts
The key point is that while Anika has performed well for two of its last three quarters, valuation matters in the market. Anika's fundamental growth significantly lags its stock gains. Sooner or later, though, a company's fundamentals and stock performance will align. Anika was cheap last year, but today it is pricey.

In the case of Santarus and Questcor, while both stocks do have risks associated with them, I've owned both for more than two years. Despite large gains, they seem reasonably valued at just 15 and 11 times next year's earnings, respectively. While Anika's stock performance has outperformed its fundamental growth, Santarus and Questcor's earnings growth exceed that of their stock performance. This makes both attractive in an industry that is loaded with momentum, and both stocks will likely continue to trade higher with long-term fundamental gains.

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The article Should You Be Excited About This Biotech's Earnings? originally appeared on Fool.com.

Brian Nichols owns shares of Questcor and Santarus. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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