Quickel's biotech trio

by Stephen Quickel, editor US Investment Report

Here's a look at a trio of biotechnology stocks added to our recommended buy list: Endo Pharmaceuticals Holdings (ENDP), United Therapeutics (UTHR) and Zoll Medical (ZOLL).

Endo Pharmaceuticals is a drug company in a hurry. It has pulled off four major acquisitions in two years, the last being American Medical Systems in June for $2.9 billion.

By the end of 2012 it will have doubled revenues from $1.6 billion in 2010 to $3.2 billion. It lifted 3Q revenues 71% and earnings 45%, with big gains in all three of its business segments: branded drugs, generic drugs and medical devices & services.

As the revenues flow, earnings should follow. Analysts still forecast moderate 12-13% a year bottom-line growth, but foresee a 25% jump in the coming 12 months.

Amazingly, its forward P/E is just 6 times 2012 earnings, even after a price gain from 27 to 34
since September.

We look for 15% a year-plus earnings growth, and perhaps more, as the acquisitions are digested and new drugs are approved. That could lift ENDP from the mid-30s to the mid-40s near-term.

If you like rapid growth rates and inordinately low share prices, check out United Therapeutics, a biotech specializing in treatments for cardiovascular, inflammatory and infectious diseases.

Sales are on the rise from $612 million in 2010 to nearly $900 million in 2012. Earnings are expected to grow by 32% a year, from $2.23 a share to $3.91 next year and $4.60 in 2013. Yet the stock trades at just 11 times 2012 earnings, 40% off its 52-week high.

That piece discount may worry skeptics, but not founding CEO Martine Rothblatt, holder the PhD, JA and MBA degrees, who raised eyebrows by purchasing $2.7 million of her own stock in six batches this year.

UTHR peaked at 57 in July, fell to 37 in early October, but has recovered to 44 in recent weeks.

Zoll Medical is another healthcare small cap that should do well. Zoll’s main business is selling resuscitation devices such as Life-Vest wearable defibrillator for reducing cardiac arrest.

Priced 46 when we began researching the stock a few weeks ago, it last week it suddenly
shot to 60 on a favorable Medicare reimbursement ruling on Life-Vest.

But with sales rising and earnings expected to jump more than 30% a year, Zoll’s 23 P/E translates into a 0.61 PEG ratio. Our own 6- to 12-month target price for ZOLL is 76.

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