Why Anacor Pharmaceuticals, Inc. Shot Higher

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares in Anacor Pharmaceuticals jumped by more than 15% today after reporting fourth quarter sales and earnings that eclipsed Wall Street forecasts.

So what: Last July, the biopharmaceuticals company won an important FDA approval for its topical toenail fungus medication, Kerydin. The condition, referred to as onychomycosis, affects an estimated 36 million people in the United States, of which 5 to 6 million receive treatment.

Following Kerydin's approval, the company found a willing commercialization partner in Novartis' Sandoz unit. Sandoz paid Anacor $40 million up front, and agreed to pay an additional $25 million milestone payable this past January, to get the U.S. rights to Kerydin. This year, Sandoz and Anacor are sharing gross profit equally on U.S. sales above $50 million. After this year, all gross profits will be split between the two companies.

Sandoz began marketing the drug in September, so this fourth quarter report is the first glimpse investors are getting into whether or not Kerydin can be a commercial success. The results, while not spectacular, were solid. Anacor recorded $4.7 million in commercialization gross profit revenue on Kerydin in the quarter.

Now what: Previously, Anacor had offered up pretty high hopes for Kerydin, suggesting that it could have billion dollar peak sales potential. That's a lofty target for this drug, especially given that sales during its first full quarter on the market trailed those ofValeant Pharmaceuticals'Jublia, a competing drug that also won FDA approval for onychomycosislast year and that posted sales of $54 million in the fourth quarter.

There are some things to like about Anacor. Kerydin could become a much bigger seller in the future. After all, Kerydin is arguably safer than Lamisil, a prior generation treatment that racked up $1.2 billion in annual sales at its peak. Anacor also benefits from having a deep-pocketed marketing partner in Sandoz, andwith $191.6 million in cash on the books, it has plenty of financial firepower. For those reasons, this an intriguing company; however, until sales become more meaningful, I think investors should avoid chasing this one any higher.

The article Why Anacor Pharmaceuticals, Inc. Shot Higher originally appeared on Fool.com.

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. The Motley Fool recommends Valeant Pharmaceuticals. The Motley Fool owns shares of Valeant Pharmaceuticals. 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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