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Ride This Overlooked Biotech's Pipeline To 45% Upside

Marshall Hargrave

They say investing in the stock market is all about forward thinking. That's certainly the case with the biotech sector. A biotech's pipeline can mean the difference between boom and bust.

The Medicines Co. (Nasdaq: MDCO) is a global biotech company with seven drugs in the pipeline that could prove to be big hits in the acute and intensive care hospital product market. The company's key legacy product and top revenue generator, Angiomax, continues to bring in profits, and in addition to its robust in-house development pipeline, the company also recently teamed up with two major drug companies and made a key acquisition -- all of which should only further accelerate  its growth.

The biggest factor keeping Medicines below what I consider its fair value is its ongoing lawsuit with Hospira (NYSE: HSP). In 2010, Hospira sued to market its generic version of Angiomax before Medicines' patents expire. A decision is expected next year, but regardless of the outcome, Medicines could lose its Angiomax exclusivity as soon as mid-2015.

What many investors are missing is that Medicines appears to have a bright future despite its legal fight over Angiomax, thanks to the clinical successes within its pipeline. When Angiomax does lose exclusivity, Medicines will already be a diversified biopharma company.

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What's more, over 90% of Medicines' sales come from the U.S., so there is considerable opportunity for international expansion. Medicines is focusing its sales and marketing efforts to faster-growing markets overseas, establishing operations where it can commercialize its other legacy products as well as other products in development.

Its pipeline is where the company's greatest growth potential lies, and Medicines has a couple of promising candidates in clinical trials. The company plans to file for FDA approval for its oritavancin drug, designed to fight acute skin infections, in the current quarter and for European Medicines Agency approval next year. Medicines has already filed for FDA approval of its anti-platelet cangrelor drug -- which is expected to be one of the company's biggest sellers next year and in 2015 -- and is hoping for approval by mid-2014. The company will file for approval of Cangrelor in Europe this quarter, with approval also expected next year.

Beyond Medicines' in-house pipeline, the company also recently partnered with two major drugmakers. As part of its global collaboration agreement with AstraZeneca (NYSE: AZN), Medicines will co-promote the oral tablet anti-platelet medicine Brilinta in the U.S. Its other partnership is a collaboration with Alnylam Pharmaceuticals (Nasdaq: ALNY) to develop and make therapeutic products targeting the proprotein convertase subtilisin/kexin type 9 (PCSK9) gene, which plays a prominent role in the body's production of cholesterol.

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On the acquisition front, Medicines completed its purchase of ProFibrix in August after reviewing the Phase III clinical trials of ProFibrix's lead product, Fibrocaps, This product, still being developed, is expected to help stop bleeding during surgery. Medicines paid $90 million in cash, with another $140 million contingent on hitting development milestones. Medicines estimates Fibrocaps could produce peak sales of $300 million; this figure could rise if Medicines receives approval of a spray device it's developing for delivering Fibrocaps.

So Medicines is making progress in diversifying revenues. The company projects its new products can deliver revenue growth of 20% through 2018. Its newly launched products currently account for less than 5% of revenues, but this number is expected to jump above 45% in just a couple of years.

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Risks to Consider: Shares have rallied more than 70% in the past year on anticipation of these new drugs coming to market, so most of MDCO's potential gains may have already been realized. There's also Medicines' possible early loss of exclusivity on Angiomax, its biggest earner, to consider.

Action to Take --> Based on a 2016 sales estimate of roughly $1 billion, Medicines is trading at an enterprise value-to-sales ratio of 2, compared with the industry average of over 3. Given the company's robust pipeline, there's no reason to believe it won't be trading in line with the industry in a couple of years. Analysts expect Medicines' earnings per share to grow at a compound annual growth rate of 31.5% over the next five years, compared with an expected average CAGR of 20% for the industry. An EV/sales multiple of 3 on 2016 sales estimates puts the upside at $55 a share.

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