3 Stocks We're Watching in the First Quarter

By George Budwell, Keith Speights, and Cory Renauer Markets Fool.com

The first-quarter of 2017 is already chock-full of weighty news events and potential catalysts that have investors' collective heads spinning. So while it may be tough to concentrate with so much going on, our Foolish contributors think that Bristol-Myers Squibb (NYSE: BMY), Gilead Sciences (NASDAQ: GILD), andLexicon Pharmaceuticals (NASDAQ: LXRX) deserve your attention right now. Read on to find out why.

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Can Bristol-Myers Squibb rekindle the magic?

George Budwell(Bristol-Myers Squibb): Bristol-Myers Squibb's shares have now lost approximately 33% of their value from their former 52-week high. Long story short, the drugmaker's shares have basically been in free fall mode ever since its core immuno-oncology medicine, Opdivo, failed to show a clinical benefit in a pivotal-stage study for frontline non-small cell lung cancer (NSCLC).

Image Source: Getty Images.

Besides wiping several billion in additional sales off the table -- at least in the near-term -- this clinical failure essentially handed over this extremely lucrative indication to Merck's competing therapy, Keytruda, and may have made Opdivo far less attractive to clinicians in the later line settings of the disease as well.

However, Bristol's meteoric descent is arguably way overdone at this point. The drugmaker's shares, after all, are currently trading at a price-to-sales ratio of 4.6, which is dirt cheap for a company with a top-notch oncology portfolio.

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But the real reason this stock has my attention this quarter is because of the growing potential of a takeover bid. The big picture issue is that Opdivo is unquestionably a true backbone medicine that's eventually going to form the basis of numerous immuno-oncology therapies over the next decade. So with Bristol's valuation in the drink, so to speak, I wouldn't be surprised if one or more biopharmas step up with an offer soon with the hope of adding Opdivo to their own portfolio.

Whether or not Bristol's management would entertain an offer is another matter, but a buyout bid could be the catalyst that rekindles the market's interest in this top pharma stock.

Gilead Sciences, Inc.: 32 billion reasons to watch

Cory Renauer(Gilead Sciences): I'll be watching this biotech stock closely this quarter for signs of another big acquisition. It's been just over five years since the company purchased Pharmasset and the compound that became the cornerstone of its hepatitis C franchise for $11.2 billion, which turned out to be one of the best biotech investments of all time.

The company finished 2016 with about $32.4 billion in cash and equivalents. That would be more than enough to bolster its budding oncology program with an acquisition of Tesaro, or evenIncyte. It could also add to an already comprehensive attempt to develop the first approved treatment of non-alcoholic steatohepatitis with the purchase of Intercept Pharmaceuticals.

Despite having an enormous pile of cash to spend and a history of big acquisitions, Gilead is famous for its acquisitive discipline. Investors have been clamoring for more action on its M&A front, but management has been steadfast in its conviction that clinical-stage biotech assets are far too expensive right now.

Unfortunately, a disparaging fourth-quarter earnings report could change its tune. Gilead recently upset investors by reporting 2016 sales fell 6.8% from the previous year, then forecasting another drop of at least 18.2% this year. Hepatitis C treatments that surged following their launches then subsided in the face of more recent competition, along with less urgent demand, are to blame. The answer to Gilead's woes, according to legions of investors and analysts, is another transformative acquisition. Keep your eyes peeled for signs it might finally be time.

Playing the waiting game

Keith Speights(Lexicon):Waiting on the Food and Drug Administration (FDA) is something biotechs get used to over time, but Lexicon Pharmaceuticals is having to wait a little longer than it hoped.

The FDA was originally scheduled to announce a decision on approving Lexicon's carcinoid syndrome drugtelotristat ethylby Nov. 30, 2016. However, the agency needed more timeand extended its review by three months. A decision on potential approval for the drug should be announced by February 28.

My hunch is that Lexicon will get a green light from the FDA. Two late-stage studies showed thatpatients takingtelotristat ethyl had significantly reduced daily bowel movements (the primary outcome measure of the studies) than did those on placebo. The drug's safety profile, at least at the lower 250 mg dose, appeared to be similar to that of a placebo.

Some analysts think telotristat ethyl could reach peak annual sales of more than $500 million if the drug is approved. I suspect Lexicon's stock could be in for a big boost in a few weeks. However, there's always a chance that the FDA delivers disappointing news. Investors who don't want to take on significant risk might want to play the waiting game themselves.

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The author(s) may have a position in any stocks mentioned.

Cory Renauer owns shares of Gilead Sciences. George Budwell has no position in any stocks mentioned. Keith Speights owns shares of Gilead Sciences. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has a disclosure policy.