We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Small Drugmakers Edging Out the Bigshots: 7 Stocks to Buy
Read MoreHide Full Article
While many investors eye large companies for safe investing, small companies are in fact a great place to find big investment returns. At present, this holds true for the specialty-pharma sector where the smaller drugmakers are performing better than their larger counterparts.
Most of these small drugmakers have a small marketed drugs portfolio or possibly even no commercial-stage drugs at all. Some of these clinical stage drugmakers are dependent on just one pipeline candidate. Thus, the success or failure of their key pipeline candidate/s in clinical studies can significantly drive the stock’s price.
A partnership deal with a popular drug maker is a good sign about the potential of the small pharma companies, especially when there's an equity investment included in the deal. For most of these companies, upfront or milestone payments from collaboration partners – in most cases their larger counterparts – are the only source of revenues. These companies therefore need ample free cash flow to fund their huge R&D costs. Smaller companies are also likely to benefit more from increasing M&A activity in the medical sector this year.
For these companies, succeeding in a shifting global market and evolving healthcare landscape requires them to adopt innovative business models, invest in new technologies, increase investments in personalized medicines and seek external partners and collaborators for complementary strengths.
These smaller innovative companies, in general, are having a relatively better year than their larger counterparts, which are in trouble due to generic competition for their key drugs, pricing issues and rising competition. Successful innovation resulting in new drug approvals, important advances in clinical studies of their pipeline candidates, strategic collaborations with strong partners and frequent M&A activity have kept the small companies afloat in an aggressive competitive market.
The Zacks Medical-Drugs, which is a huge 163-stock group of drug companies that make medicines for human use mainly from small molecules and artificial materials, within the broader Zacks Medical Sector, has outperformed both the S&P 500 and its own sector on a year-to-date basis.
While the stocks in the Medical-Drugs industry have collectively risen 5.3%, the Zacks S&P 500 Composite has risen 4.1% and the Zacks Medical Sector has risen a marginal 0.2%. On the contrary, the Zacks Large Cap Pharma Industry has declined 3.7% year to date.
Favorable Zacks Rank
The Zacks Medical-Drugs industry currently carries a Zacks Industry Rank #101, which places it at the top 40% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Cheap Valuation
Despite the outperformance of the industry this year, its valuation looks cheap now. One might get a good sense of the industry’s relative valuation by looking at its trailing twelve months price-to-sales ratio (P/S TTM), which is the most appropriate multiple for valuing small drug companies many of which are loss making companies.
The industry currently has a P/S TTM ratio of 2.74X. The space looks inexpensive when compared with the Medical market at large, as the P/S TTM for the Medical market is 2.89X.
Price-to-Sales Trailing Twelve Months (TTM)
Compared to the Zacks S&P 500 Composite too, the space looks cheap. The current P/S TTM ratio of 3.4 for the S&P 500 is above Zacks Medical-Drugs industry’s current ratio.
Price-to-Sales Trailing Twelve Months (TTM)
Even price-to-free cash flow is a good metric for evaluating small pharmaceutical firms that have to ensure consistent cash to meet their substantial capital investments and expenditures. The companies should be able to function through times when these are making substantial expenditures that are yet to pay off.
Even using the price-to-free cash flow (adjusted) metric, the space looks inexpensive compared with the Medical market at large. The current price-to-free cash flow (adjusted) ratio for the Medical market is 11.58 while that for Medical-Drugs industry is 7.06.
Price-to-Free Cash Flow (adjusted)
Our Choices
As sales of larger pharma companies are decelerating due to slowing product growth and increasing price pressure, investment in small- and mid-cap drugmakers makes more sense. Here we pick seven small specialty drugmakers, which carry a Zacks Rank #1 (Strong Buy) or #2 (Buy). All these companies have witnessed positive earnings estimate revisions and their stock price has risen this year so far.
Taro Pharmaceutical is a subsidiary of Sun Pharmaceutical Industries Ltd of India and markets prescription and over-the-counter pharmaceutical products across several therapeutic areas. This company, which sports a Zacks Rank #1, has seen its stock rise 14.5% this year. The company’s 2018 earnings estimates rose 13.1% while that for 2019 increased 12.4% over the past 60 days.
AcelRx Pharmaceuticals, Inc.
This Redwood City, CA based drugmaker makes medicines to treat acute pain. This #2 Ranked company has seen its stock rise 102.4% so far this year. Loss estimates narrowed from 98 cents to 81 cents for 2018 and from 84 cents to 75 cents for 2019 over the past 60 days.
The Watertown, MA based company, which makes small molecule drugs for the treatment of viral infections and liver diseases, has a Zacks Rank of 2. The company’s earnings estimates significantly increased from 86 cents to $3.17 for 2018 and from a loss of 85 cents to $3.13 for 2019 over the past 60 days. The stock has risen 94.3% year to date.
Shares of this Newton, MA based drugmaker for rare-diseases have risen 35.3% this year so far. The Zacks Rank #2 company has seen its loss estimates narrow almost 29% for 2018 and almost 19% for 2018 over the past 60 days.
This Zacks #2 Ranked Salt Lake City, UT based company makes regenerative tissue products and biomaterials for the fields of medicine, biomedical engineering, and material sciences. Shares of the company have risen 30.5% so far this year. Its loss estimates narrowed from $3.39 to $3.26 for 2018 and from $1.84 to $1.61 for 2019 over the past 60 days.
This Israel based specialty drugmaker makes medicines for gastrointestinal and inflammatory diseases, and cancer. This #2 Ranked company has seen its stock rise 59.3% year to date. Loss estimates narrowed from $1.90 to $1.77 for 2018 and from $1.40 to $1.30 for 2019 over the past 60 days.
This Zacks #2 Ranked Dublin, Ireland based company has seen its stock rise 32% this year so far. The drugmaker, which focuses on sleep and hematology/oncology therapeutic areas, saw its 2018 earnings estimates rise 0.5% while that for 2019 increased 0.3% over the past 60 days.
Year-to-Date Price Performance of 7 Stocks
Conclusion
The smaller companies have their share of risk in the form of unstable cash flow. Also, negative clinical outcomes or regulatory obstacles can be huge setbacks for these smaller companies and significantly hurt their share price. Nonetheless, considering their low price and bright growth prospects, these prove to be great investment opportunities.
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.
Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
Image: Bigstock
Small Drugmakers Edging Out the Bigshots: 7 Stocks to Buy
While many investors eye large companies for safe investing, small companies are in fact a great place to find big investment returns. At present, this holds true for the specialty-pharma sector where the smaller drugmakers are performing better than their larger counterparts.
Most of these small drugmakers have a small marketed drugs portfolio or possibly even no commercial-stage drugs at all. Some of these clinical stage drugmakers are dependent on just one pipeline candidate. Thus, the success or failure of their key pipeline candidate/s in clinical studies can significantly drive the stock’s price.
A partnership deal with a popular drug maker is a good sign about the potential of the small pharma companies, especially when there's an equity investment included in the deal. For most of these companies, upfront or milestone payments from collaboration partners – in most cases their larger counterparts – are the only source of revenues. These companies therefore need ample free cash flow to fund their huge R&D costs. Smaller companies are also likely to benefit more from increasing M&A activity in the medical sector this year.
For these companies, succeeding in a shifting global market and evolving healthcare landscape requires them to adopt innovative business models, invest in new technologies, increase investments in personalized medicines and seek external partners and collaborators for complementary strengths.
These smaller innovative companies, in general, are having a relatively better year than their larger counterparts, which are in trouble due to generic competition for their key drugs, pricing issues and rising competition. Successful innovation resulting in new drug approvals, important advances in clinical studies of their pipeline candidates, strategic collaborations with strong partners and frequent M&A activity have kept the small companies afloat in an aggressive competitive market.
The Zacks Medical-Drugs, which is a huge 163-stock group of drug companies that make medicines for human use mainly from small molecules and artificial materials, within the broader Zacks Medical Sector, has outperformed both the S&P 500 and its own sector on a year-to-date basis.
In fact, it has also outperformed the Zacks Large Cap Pharma Industry, which is a 14-stock group.
Year-to-Date Price Performance
While the stocks in the Medical-Drugs industry have collectively risen 5.3%, the Zacks S&P 500 Composite has risen 4.1% and the Zacks Medical Sector has risen a marginal 0.2%. On the contrary, the Zacks Large Cap Pharma Industry has declined 3.7% year to date.
Favorable Zacks Rank
The Zacks Medical-Drugs industry currently carries a Zacks Industry Rank #101, which places it at the top 40% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Cheap Valuation
Despite the outperformance of the industry this year, its valuation looks cheap now. One might get a good sense of the industry’s relative valuation by looking at its trailing twelve months price-to-sales ratio (P/S TTM), which is the most appropriate multiple for valuing small drug companies many of which are loss making companies.
The industry currently has a P/S TTM ratio of 2.74X. The space looks inexpensive when compared with the Medical market at large, as the P/S TTM for the Medical market is 2.89X.
Price-to-Sales Trailing Twelve Months (TTM)
Compared to the Zacks S&P 500 Composite too, the space looks cheap. The current P/S TTM ratio of 3.4 for the S&P 500 is above Zacks Medical-Drugs industry’s current ratio.
Price-to-Sales Trailing Twelve Months (TTM)
Even price-to-free cash flow is a good metric for evaluating small pharmaceutical firms that have to ensure consistent cash to meet their substantial capital investments and expenditures. The companies should be able to function through times when these are making substantial expenditures that are yet to pay off.
Even using the price-to-free cash flow (adjusted) metric, the space looks inexpensive compared with the Medical market at large. The current price-to-free cash flow (adjusted) ratio for the Medical market is 11.58 while that for Medical-Drugs industry is 7.06.
Price-to-Free Cash Flow (adjusted)
Our Choices
As sales of larger pharma companies are decelerating due to slowing product growth and increasing price pressure, investment in small- and mid-cap drugmakers makes more sense. Here we pick seven small specialty drugmakers, which carry a Zacks Rank #1 (Strong Buy) or #2 (Buy). All these companies have witnessed positive earnings estimate revisions and their stock price has risen this year so far.
Taro Pharmaceutical Industries Ltd. (TARO - Free Report)
Taro Pharmaceutical is a subsidiary of Sun Pharmaceutical Industries Ltd of India and markets prescription and over-the-counter pharmaceutical products across several therapeutic areas. This company, which sports a Zacks Rank #1, has seen its stock rise 14.5% this year. The company’s 2018 earnings estimates rose 13.1% while that for 2019 increased 12.4% over the past 60 days.
AcelRx Pharmaceuticals, Inc.
This Redwood City, CA based drugmaker makes medicines to treat acute pain. This #2 Ranked company has seen its stock rise 102.4% so far this year. Loss estimates narrowed from 98 cents to 81 cents for 2018 and from 84 cents to 75 cents for 2019 over the past 60 days.
Enanta Pharmaceuticals, Inc. (ENTA - Free Report)
The Watertown, MA based company, which makes small molecule drugs for the treatment of viral infections and liver diseases, has a Zacks Rank of 2. The company’s earnings estimates significantly increased from 86 cents to $3.17 for 2018 and from a loss of 85 cents to $3.13 for 2019 over the past 60 days. The stock has risen 94.3% year to date.
Acer Therapeutics Inc. (ACER - Free Report)
Shares of this Newton, MA based drugmaker for rare-diseases have risen 35.3% this year so far. The Zacks Rank #2 company has seen its loss estimates narrow almost 29% for 2018 and almost 19% for 2018 over the past 60 days.
PolarityTE, Inc. (COOL - Free Report)
This Zacks #2 Ranked Salt Lake City, UT based company makes regenerative tissue products and biomaterials for the fields of medicine, biomedical engineering, and material sciences. Shares of the company have risen 30.5% so far this year. Its loss estimates narrowed from $3.39 to $3.26 for 2018 and from $1.84 to $1.61 for 2019 over the past 60 days.
RedHill Biopharma Ltd. (RDHL - Free Report)
This Israel based specialty drugmaker makes medicines for gastrointestinal and inflammatory diseases, and cancer. This #2 Ranked company has seen its stock rise 59.3% year to date. Loss estimates narrowed from $1.90 to $1.77 for 2018 and from $1.40 to $1.30 for 2019 over the past 60 days.
Jazz Pharmaceuticals plc (JAZZ - Free Report)
This Zacks #2 Ranked Dublin, Ireland based company has seen its stock rise 32% this year so far. The drugmaker, which focuses on sleep and hematology/oncology therapeutic areas, saw its 2018 earnings estimates rise 0.5% while that for 2019 increased 0.3% over the past 60 days.
Year-to-Date Price Performance of 7 Stocks
Conclusion
The smaller companies have their share of risk in the form of unstable cash flow. Also, negative clinical outcomes or regulatory obstacles can be huge setbacks for these smaller companies and significantly hurt their share price. Nonetheless, considering their low price and bright growth prospects, these prove to be great investment opportunities.
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.
Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
See the pot trades we're targeting>>