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5 Pharma & Biotech Stocks That Could Be Big Winners in Q2 Earnings

Drug stocks have bounced back this year with the NASDAQ Biotechnology Index and the NYSE ARCA Pharmaceutical Index gaining 18.6% and 10.8%, respectively, year-to-date (YTD).

There are several reasons for this improved performance. Investors are now more comfortable with the drug pricing scenario and are willing to look at the fundamentals of the sector. Although the drug pricing issue will remain a headwind, expectations are that steps taken by the Trump administration to drive down drug prices will not be as draconian as previously expected.  

Deregulation and increased competition seem to be some of the ways that will be used to control drug prices. FDA Commissioner Scott Gottlieb recently said that the agency is working on a plan to lower healthcare costs by speeding up the development of next-generation treatments, especially for rare diseases or targeted cancer therapies. The FDA is also working on clearing up a backlog of orphan drug applications. YTD, the FDA has approved 23 new drugs surpassing last year’s total of 22.

Other factors like ramp up in new product sales, R&D success and innovation, strong results, a higher number of FDA approvals and continued strong performance from legacy products should contribute to a sustained recovery in the sector.

Tax reforms and cash repatriation would boost performance as well.

Given this scenario and with healthcare sector earnings round the corner, it would make sense to look at some pharma and biotech stocks that are expected to report a positive earnings surprise in the quarter.

Investing in such stocks could prove beneficial for investors as an earnings beat usually leads to significant share price appreciation.

5 Drug Stocks to Watch Out for This Earnings Season

With the help of the Zacks Stock Screener, we have zeroed-in on five pharma and biotech stocks that sport a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) and have a positive Earnings ESP. Earnings ESP is a very valuable tool for investors looking for stocks that are most likely to beat earnings estimates. Moreover, adding a Zacks Rank of #1, 2 or 3 has produced a positive surprise 70% of the time. While you can see the complete list of today’s Zacks #1 Rank stocks here, you can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter.

Merck & Co., Inc. MRK: Kenilworth, NJ-based Merck is known for its strong presence in the pharmaceuticals and vaccines market. The company also has a presence in the animal health segment. Some of the better known products in Merck’s portfolio include Keytruda, Gardasil, Januvia/Janumet, Isentress, Vytorin/Zetia and Remicade among others. Merck, a Zacks Rank #2 stock, has consistently surpassed earnings expectations over the last four quarters with an average surprise of 4.36%. The company is expected to report Q2 earnings on Jul 28 -- earnings ESP for Q2 is 1.15%. Although the company does have challenges in the form of generic competition as well as safety issues related to some studies being conducted with Keytruda, new products and the strong performance of the base business should provide support. Merck also has a deep pipeline which bodes well for long-term growth.

Eli Lilly and Company LLY: Indianapolis, IN-based Lilly, which has a strong presence in the pharmaceuticals as well as animal health segments, is slated to report second quarter 2017 results on Jul 25. This Zacks Rank #3 stock has an earnings ESP of 0.97% for the second quarter. Lilly surpassed earnings expectations in two of the last four quarters with a positive surprise of 2.08% in the first quarter. Although the company is facing challenges including generic competition, new products as well as the diabetes segment should drive results. Lilly has several important pipeline catalysts lined up for 2017 as well. Estimated earnings growth for the current year is 16.7%.

Lilly has performed better than the Zacks-categorized Large Cap Pharmaceuticals industry YTD with shares gaining 13.5% while the industry is up 11.3%.

Celgene Corporation CELG: Summit, NJ-based Celgene is focused on developing treatments for cancer and inflammatory diseases. Blood cancer drug, Revlimid, should continue to perform well with the newly diagnosed myeloma launch driving global increases in demand and duration. Pomalyst/Imnovid (multiple myeloma) is also benefiting from increasing use of triplets and duration gains. Otezla, which experienced some softness in sales in Q1, should bounce back with additional commercial lives gaining access to the drug. Celgene is also diversifying its portfolio and has a deep and promising pipeline. The company has some important pipeline events this year which could act as positive catalysts. Celgene also has some important regulatory events lined up this year -- the FDA is expected to respond on the approval status of Idhifa (acute myeloid leukemia) by Aug 30, 2017. Meanwhile, the company expects to file for approval of experimental multiple sclerosis treatment, ozanimod, by year end.

Celgene, a Zacks Rank #3 stock, will be reporting Q2 results on Jul 27. The company, which has surpassed earnings expectations in three of the last 4 quarters, is expected to post a positive earnings surprise of 1.86% in Q2. Celgene’s shares are up 15.4% YTD, surpassing the Zacks-categorized Medical-Biomedical/Genetics industry which is up 7.9%.

Gilead Sciences, Inc. GILD: Foster City, CA-based Gilead is well known for its position in the HIV and hepatitis C virus (HCV) markets. Although the company’s HCV franchise sales are under pressure, the HIV franchise is performing well. Gilead, which surpassed earnings expectations in Q1, will be reporting Q2 results on Jul 26. The Zacks Rank #3 stock has a positive earnings ESP of 1.45% for Q2.

Although Gilead’s performance has lagged the Zacks-categorized Medical-Biomedical/Genetics industry YTD, shares could get a boost if the company delivers a positive surprise. Investor focus will also remain on the company’s plans for pursuing business development deals and on its pipeline.

Shire plc SHPG: Dublin, Ireland-based Shire enjoys a strong presence in the attention deficit hyperactive disorder (ADHD) market. The company is also focused on treatments for rare diseases. Shire, a Zacks Rank #3 stock, has an earnings ESP of 3.68% for the second quarter. The company has surpassed earnings estimates in three of the last four quarters with an average surprise of 6.73%. Shire is expected to report 2Q results on Aug 3.

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