Top Rankings for Biotech and Generic Drug Companies
Key Points:
- A comparative lack of economic sensitivity has kept Medical as the best ranked sector
- Many biotech and generic drug companies are Zacks #1 Rank or Zacks #2 Rank stocks
Biotech and Generic Drugs Makers Among Best Ranked Groups
Medical continues to be the leading sector in terms of positive earnings estimate revisions. The comparatively low level of economic sensitivity is a big factor for why the sector ranks so well.
Multiple companies within the sector have reported good third-quarter earnings and raised guidance. These bullish events have led to positive earnings estimate revisions by brokerage analysts. They have also allowed Medical-Biomedical/Genetics and Medical-Generic Drugs to be among the best ranked industry groups.
Investors who are interested in both groups should note that company stories matter more than in other groups. The reason is that drug approval and drug safety issues are factors that can significantly influence a stock's price. Therefore, a greater focus on company selection is required than in other industry groups.
Share price is an additional factor for investors to consider. Many of the Zacks #1 Rank stocks in Medical-Biomedical/Genetics trade at prices below $5, such as Discovery Laboratories (DSCO - Snapshot Report). Even though brokerage analysts have become more optimistic about the prospects for DSCO and other small-cap biotech companies, the low share prices imply a higher degree of risk.
There are, however, several companies within both groups that are enjoying positive business momentum and are larger in size, including Alpharma (ALO), Amgen (AMGN - Analyst Report) and Teva Pharmaceuticals (TEVA - Snapshot Report).
FLECTOR Patch Boosts Alpharma's Numbers
Alpharma generated third-quarter profits of 10 cents per share, 3 cents above expectations.
Revenues rose 32% to $175.7 million. A 9% sequential quarterly increase in prescriptions for the FLECTOR Patch, an anti-inflammatory drug, helped to drive growth in the company's pharmaceuticals division. Lower commodity costs, which have made it cheaper to raise livestock, helped ALO's Animal Health segment.
All of the covering brokerage analysts raised their full-year forecasts on ALO following the release of the earnings report, pushing the consensus earnings estimate 14 cents higher to 34 cents per share.
There are 2 issues involving ALO to which investors should pay attention, however.
First, King Pharmaceuticals (KG - Analyst Report) is attempting to acquire ALO for $37 per share in cash. Alpharma's board has so far rejected the offer.
Secondly, a FDA advisory committee will consider ALO's new drug application for EMBEDA (a pain reliever for arthritis) this Friday, Nov 14. Any information about the safety of the drug could have an impact on the share price.
ALO is a Zacks #1 Rank ("strong buy") stock
Amgen Beats Again
Amgen earned $1.21 in the third quarter. The adjusted earnings were 15 cents above expectations and represented the 6th consecutive positive surprise for the company. Revenues rose 7% to $3.9 billion, driven by greater demand for Neulasta and ENBREL.
AMGN also raised its full-year adjusted EPS guidance to between $4.25 and $4.45 per share. Previously, the company had forecast per share profits of $4.25 to $4.45.
All of the covering brokerage analysts raised their forecasts in response, pushing the consensus earnings estimate 16 cents higher to $4.45 per share.
AMGN is a Zacks #1 Rank stock.
Emerging Markets Help Teva Pharmaceuticals
Teva Pharmaceutical Industries topped estimates and raised guidance late last week.
Third-quarter earnings totaled 72 cents. The 3-cent surprise was the 7th consecutive time that the company has topped expectations.
Revenues rose 20% to $2.84 billion. Sales improved particularly in Latin America, Russia, Israel and Turkey. Multiple sclerosis treatment Copaxone also was a key driver of growth.
The drug maker now expects full-year profits between $2.79 and $2.85 per share, a 10-cent increase over the previous guidance. All of the covering brokerage analysts raised their projections in response, resulting in a consensus earnings estimate of $2.80 per share.
TEVA is a Zacks #2 Rank ("buy") stock.
Other Zacks Rank Buy Stocks
AMGN is classified in Medical/Biomedical/Genetics. This group contains 15 other Zacks #1 Rank stocks, including DSCO, Lexicon Pharmaceuticals (LXRX - Snapshot Report) and Regeneron (REGN - Analyst Report).
ALO and TEVA are classified in Medical-Generic Drugs. This group contains 5 other Zacks #2 Rank stocks, including Watson Pharmaceuticals (WPI - Snapshot Report).
Obama and Healthcare
President-elect Obama ran on a platform of reforming health care. Though he intends to allow the federal government to negotiate on drug prices, he also wants universal coverage. It is possible that drug companies could end up seeing a greater amount of business, albeit at lower margins.
This said, any significant change to the healthcare system will not be easy to make. The healthcare industry will push back hard, and many other special interests will try to wield influence as well.
Plus, the Zacks Rank is a short-term indicator designed to cover periods of 1-3 months. True change to the health care system will take considerably longer to plan and implement.
Related ETFs
Many ETFs have a focus on biotech companies. The Nasdaq Biotechnology iShares (IBB) has both AMGN and TEVA among its top holdings.
There are no specific funds that target generic drug makers.
Zacks Premium and Zacks Elite subscribers can view the Zacks Industry Rank List at http://www.zacks.com/zrank/zrank_inds.php. This interactive list allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. Shown below is the Zacks Sector Rank List, which shows the trend in estimate revisions on a broader scale.
| Sector Rank as of Nov 12 | ||||||
| Sector | This Week's Zacks Rank | Last Week's Zacks Rank | FY08 Revisions Ratio | FY08 Estimates Revised Up | FY08 Estimates Revised Down | FY09 Revisions Ratio |
| Medical | 2.56 | 2.60 | 1.06 | 897 | 850 | 0.67 |
| Aerospace | 2.83 | 2.93 | 1.26 | 86 | 68 | 0.35 |
| Computer and Technology | 2.90 | 2.93 | 0.43 | 789 | 1854 | 0.17 |
| Utilities | 2.98 | 2.94 | 0.37 | 118 | 321 | 0.16 |
| Transportation | 2.99 | 2.95 | 1.28 | 272 | 212 | 0.40 |
| Consumer Discretionary | 3.01 | 2.99 | 0.38 | 209 | 546 | 0.16 |
| Business Services | 3.01 | 3.12 | 0.22 | 69 | 309 | 0.07 |
| Consumer Staples | 3.04 | 3.09 | 0.38 | 148 | 392 | 0.19 |
| Retail-Wholesale | 3.11 | 3.09 | 0.25 | 202 | 798 | 0.14 |
| Industrial Products | 3.19 | 3.16 | 0.32 | 137 | 426 | 0.07 |
| Finance | 3.19 | 3.18 | 0.30 | 615 | 2057 | 0.12 |
| Construction | 3.24 | 3.18 | 0.25 | 57 | 228 | 0.08 |
| Oils-Energy | 3.26 | 3.25 | 0.33 | 330 | 1000 | 0.13 |
| Basic Materials | 3.33 | 3.27 | 0.26 | 117 | 444 | 0.08 |
| Conglomerates | 3.37 | 3.30 | 0.09 | 9 | 105 | 0.02 |
| Auto-Tires-Trucks | 3.62 | 3.57 | 0.06 | 11 | 183 | 0.05 |
Charles Rotblut, CFA, is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.