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Biotech Stock Outlook: Approval of New Drugs to Boost Performance

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The Zacks Biomedical And Genetics industry includes biopharmaceutical and biotechnology companies that develop multi-million dollar drugs for a broad range of therapeutic areas such as neuroscience, cardiovascular and metabolism, rare diseases immunology and oncology.

All these companies invest millions of dollars to develop new and better drugs for various diseases. They are also investing significantly to expand the label of their already marketed drugs.

Here are the three major themes in the industry:

  • New drug approvals, label expansion of existing high-profile drugs, pipeline progress, growing demand for drugs, especially for rare-to-treat diseases, aging population and increased health care spending should positively impact performance. Owing to competitive pressure, many companies have resorted to cost-cutting initiatives, which should propel the bottom line somewhat.
     
  • Mergers and acquisitions (M&As) have picked up pace in the sector as a slowdown in mature products has forced companies to eye lucrative acquisitions to bolster their pipeline. Additionally, the increase in M&A activities is also being propelled by the implementation of the new tax law, which has slashed corporate tax rate from 35% to 21%. In addition, in-licensing deals continue to increase with the bigwigs collaborating with smaller and mid-sized players that boast promising mid-to-late stage pipeline candidates or interesting technology.
     
  • Headwinds faced by the industry include government scrutiny of high drug prices, decline in sales of high-profile drugs, pricing pressure, pipeline setbacks and increasing competition.

Overall, we believe that pipeline success, cost cutting, share buybacks, product launches, increased M&As and collaboration activities are likely to keep the sector afloat.

Zacks Industry Rank Indicates Bright Prospects

The group’s Zacks Industry Rank is basically the average of the Zacks Rank of all the member stocks.

The Zacks Biomedical and Genetics industry currently carries a Zacks Industry Rank #82, which places it at the top 32% of more than 256 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.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate.

Before we present a few biotech stocks that are well positioned to outperform the market based on a strong earnings outlook, let’s take a look at the industry’s stock-market performance and current valuation.

Industry Lags Sector & S&P 500

The Zacks Biomedical and Genetics Industry, which is a 312-stock group within the broader Zacks Medical Sector, has underperformed both the S&P 500 and the sector it belongs to on a year-to-date basis.

While the stocks in this industry have collectively declined 18%, the Zacks S&P 500 Composite and the Zacks Medical sector have risen 4.0% and 2.1% year to date, respectively. The magnitude of decline in bigger companies has more than offset gains recorded by the small biotechnology companies.

                                     Year-to-Date Price Performance

 

On the basis of price-to-sales (P/S) ratio, which is a commonly used multiple for valuing biotech companies with approved drugs, the industry is currently trading at 2.6X compared with the S&P 500’s 3.19X and the Zacks Medical sector's 2.97X.

Over the last five years, the industry has traded as high as 7.30X, as low as 2.29X and at a median of 2.86X, as the chart below shows.

 

Bottom Line

The biotech industry is continuously evolving and is largely volatile. In such a scenario, biotech companies are expected to adopt innovative business models, invest in new technologies, increase investments in personalized medicines and seek external partners and collabora¬tors for complementary strengths.

The sector is facing challenges like drug pricing issue, pricing/re-imbursement pressure, increasing competition, slowdown in legacy product sales, loss of patent exclusivity of some key drugs and pipeline-related setbacks.

However, pipeline success in innovative and important therapeutic areas, cost cutting, share buybacks, new product launches, increased M&A activities and appropriate utilization of cash may bring the sector back on track this year.

The industry currently has quite a few stocks, which sport either a Zacks Rank #1 (Strong Buy) or 2 (Buy). Here, we list a few such stocks that have also been witnessing positive earnings estimate revisions.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Gilead Sciences, Inc. (GILD - Free Report) is one of the leading biotech companies of the world. The Zacks Consensus Estimate for current-year EPS has been revised 4.4% upward over the past 60 days. Gilead sports a Zacks Rank #1. However, the stock has lost 1.2% so far this year.

                                         Price and Consensus: GILD

 

Regeneron Pharmaceuticals, Inc.  (REGN - Free Report) : Tarrytown, NY-based leading biopharmaceutical Regeneron has lost 8.1% this year so far.  The consensus estimate for this Zacks #2 Ranked stock's current-year EPS has risen 5.7% over the past 60 days.

                                          Price and Consensus: REGN

Alexion Pharmaceuticals, Inc. (ALXN - Free Report) : New Haven, CT based biopharmaceutical company Alexion has seen a 0.8% decrease in its share price this year so far.  The Zacks Consensus Estimate for this Zacks #1 Ranked stock's current-year EPS has risen 5.2% over the past 60 days.

                                      Price and Consensus: ALXN

 

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