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4 Drug Stocks Poised to Surprise this Earnings Season

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In the biotech sector, investor focus will now shift from the annual J.P. Morgan Healthcare Conference to the Q4 earnings season.

The sector has faced challenging conditions for more than a year due to media and political focus on steep drug pricing issues.

Meanwhile, merger and acquisitions (M&A) and licensing deals continue to hog the limelight in the drug/biotech sector. Some latest deals include Japan-based Takeda Pharmaceutical Company Limited’s (TKPYY) agreement to acquire ARIAD Pharmaceuticals (ARIA) in an all-cash deal worth approximately $5.6 billion. Pharma giant Johnson & Johnson (JNJ) is reportedly looking to take over Actelion Ltd (ALIOF). M&A deals are expected to increase in the coming months.

For the fourth quarter, market sentiment seems to be improving courtesy of raised outlooks, new product approvals and encouraging pipeline updates.

Let’s take a look at some companies in this space that have the potential to beat earnings in their upcoming Q4 releases. These stocks are well positioned in today’s market environment, and could see considerable upside riding on the aforementioned trends. An earnings beat should help these stocks gain investor confidence and show a favorable price movement.

How to Pick the Winners?

Given the large number of companies in the healthcare industry, selecting stocks that have the potential to beat estimates could seem pretty daunting. However, the proprietary Zacks methodology makes it fairly simple. One way to narrow down the list of choices is by looking at stocks that sport the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Earnings ESP.  You can see the complete list of today’s Zacks #1 Rank stocks here.

The Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising with their upcoming earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, chances of a positive earnings surprise are as high as 70%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Here are a few stocks that we believe are poised to beat estimates this earnings season:

North Chicago, IL-based AbbVie Inc. (ABBV - Free Report) has a Zacks Rank #3 and an Earnings ESP of +0.83%. This pharma giant has a mixed track record, having beaten estimates twice and met the same twice in the last four quarters, bringing an average positive surprise to 1.92%. The combination of AbbVie’s positive Earnings ESP and favorable rank indicates a likely earnings beat this quarter.

AbbVie’s flagship drug, Humira should drive growth along with cancer treatment, Imbruvica. However, hepatitis C virus (HCV) treatment, Viekira, will continue to be negatively impacted by new competition in the market.

The company is slated to report fourth-quarter and full-year 2016 results on Jan 27, before the opening bell. The Zacks Consensus Estimate is pegged at $1.20.

Next on the list is biotech company, Vertex Pharmaceuticals Incorporated (VRTX - Free Report) , which has a Zacks Rank #3 and an Earnings ESP of +400.00%. Vertex’s track record has been mixed so far, with the company beating estimates twice and missing the same twice in the four trailing quarters. Vertex’s four-quarter average negative earnings surprise is 84.38%.

Known for its strong foothold in the cystic fibrosis (CF) market, Vertex boasts two key CF products in its portfolio – Kalydeco and Orkambi. Kalydeco’s revenues should continue growing on the back of continued increase in the number of patients initiating treatment with the drug globally. However, sales of Orkambi have been slower than expected.

The Boston, MA-based company will be reporting its fourth-quarter and full-year 2016 results on Jan 25, after the market closes. The Zacks Consensus Estimate is pegged at a penny.

Third on our list is pharma giant Eli Lilly and Company (LLY - Free Report) , with an Earnings ESP of +3.06% and a Zacks Rank #3. Based in Indianapolis, IN, Lilly has beaten expectations in two of the past four quarters, bringing the average negative earnings surprise to 2.05%. However, for this quarter, Lilly seems to have bright prospects. New products like Trulicity and Cyramza as well as existing ones like Trajenta, Cialis, Forteo, Humalog Strattera and Erbitux should drive top-line growth.

Lilly is scheduled to report fourth-quarter and full-year 2016 results on Jan 31, before the opening bell. The Zacks Consensus Estimate for this quarter is pegged at 98 cents.

MediWound Ltd. (MDWD - Free Report) is the last stock on our list. The company has an Earnings ESP of +8.33% and a Zacks Rank #3. Based in Israel, MediWound focuses on developing, manufacturing and commercializing novel therapeutics based on its patented proteolytic enzyme technology to address unmet needs in the fields of severe burns, chronic and other hard-to-heal wounds. However, the company has a disappointing track record, having surpassing estimates only once in the trailing four quarters, with an average negative surprise of 18.09%.

MediWound is expected to release its fourth-quarter and full-year 2016 results on Jan 23. The Zacks Consensus Estimate for this quarter is pegged at a loss of 24 cents.

Bottom Line

Despite challenges like increasing competition, pricing pressure and biosimilars woes, we believe that key industry fundamentals for the biotech space remain promising. Further, newer therapies should facilitate growth.

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