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Bull of the Day

After a big earnings beat two weeks ago, biotech company Santarus Inc (SNTS) became a Zacks #1 Rank Strong Buy on May 7. Since then, shares have climbed over 5%.

Santarus is a specialty pharmaceutical company focused on acquiring, developing and commercializing proprietary products for the prevention and treatment of gastrointestinal diseases and disorders. Founded in 1996, they are based in San Diego, CA.

The company markets CYCLOSET tablets, and is working to commercialize GLUMETZA, drugs designed as adjuncts to diet and exercise to improve glycemic control in adults with type 2 diabetes. They've even got a drug for the treatment of travelers' diarrhea.

The Big Beat

On May 6, Santarus reported 1Q2013 EPS of $0.25 when the Street was looking for only 12 cents. The big surprise was primarily due to higher Zegerid (gastric reflux) and Uceris (ulcerative colitis) sales of $24.6M and $6.6M, respectively, vs lower analyst estimates, especially for the newer drug Uceris.

Santarus also raised full-year revenue guidance to $330M to $340M, from $320M to $325M, previously. Analysts responded very positively to the early results for Uceris and most expect revenues to exceed the upward-revised guidance.

Here's how they turned around their views on a stock that has run quite a bit already...

Biotech Fortunes Are All About the Pipeline

After the massive price run in this stock -- from $11 to $22 this year for a double -- investors should be aware of some of the risks the company faces which could be near-term headwinds.

About 85% of current revenues face patent expiry or generic launch by settlement in 2015-16. And some analysts feel that while the company's late-stage pipeline has good revenue potential, it is unclear right now whether this will fully replace revenue lost from the "generic-ization" of key franchises.

I would look to buy SNTS on pullbacks to support above $19. And I would keep an eye on the analyst earnings estimates going into their Q2 report to see if sales expectations are being guided even higher.

Biotech Stocks Are In High Demand

Another recent brightspot for the stock was how well it survived the offering of 7.9 million shares by a subsidiary of Italian drug-maker Cosmo Pharmaceuticals. The company issued 6 million shares to Cosmo in December 2008 as part of a licensing agreement for Uceris and rifamycin SV MMX and additional stock was issued as SNTS reached certain milestones.

And according to SEC documents I read today, Cosmo let go of about 4.8 million shares on May 10. They still hold about 2.9 million shares, or 4.6% of the company.

The fact that the stock gapped down to $19 and has rallied strongly since is evidence of strong demand for the shares of the $1.4 billion company among institutions. They obviously have a strong stomach for the Santarus gastrointestinal pipeline.

Now this name may be hard to buy after its big run this year. But since healthcare in general, and biotech in particular, have been the strongest drivers of the market's rally to new highs, you want to continue to trade those with a high Zacks Rank.

In my research on biotech stocks and institutional investors, I've found that the small and mid-cap names are still in high demand.

Kevin Cook is a Senior Stock Strategist with Zacks.com

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