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Small Drug Stocks Near-Term Outlook Positive, Despite Headwinds

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The Zacks Medical-Drugs industry comprises small drug companies, including some foreign ones, which make medicines for both human and veterinary use. We have a separate industry outlook discussion for some of the biggest drugmakers of the world. (Read more:  Pharmaceuticals Industry Stock Outlook: A Steady Path Ahead)

Most of these drugmakers have a small portfolio of marketed drugs or even no commercial-stage drugs at all. Some of these clinical stage drugmakers are dependent on just one pipeline candidate. For most of these companies, upfront or milestone payments from collaboration partners – in most cases their larger counterparts – are their only source of revenues. These companies therefore need ample free cash flow to fund their research and development activity..

Here are the industry’s three major themes:

  • The success or failure of key pipeline candidates in clinical studies can significantly drive stock price.
     
  • For these smaller 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. A partnership deal with a popular drugmaker is a good sign about the potential of small pharma companies, especially when there is an equity investment included in the deal.
     
  • Over the past few years, scientific and technological advancements have made it possible to develop personalized therapies. Other than that, adoption and information exchange through meaningful use of health IT, development of therapies that improve overall patient outcomes and investment in developing and emerging markets are some of the new priori­ties for drug companies, both large and small.

Successful innovation resulting in new drug approvals, important advances in clinical studies, strategic collaborations with strong partners and frequent M&A activity have kept these companies afloat in an aggressive competitive market. However, failures of key pipeline candidates in pivotal studies, regulatory and pipeline delays and lower M&A activity in the second half of the year pose concerns.


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 Medical-Drugs industry currently carries a Zacks Industry Rank #91, which places it in the top 36% 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.

Before we present a few small drug 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 Underperforms Sector & S&P 500

The Zacks Medical-Drugs industryis a huge 180-stock group within the broader Medical sector. The industry has underperformed the S&P 500 as well as the Zacks Medical Sector on a year-to-date basis.

While the stocks in this industry have collectively declined 16% year to date, the Zacks S&P 500 composite and the Zacks Medical Sector have declined 4.8% and 5.4%, respectively.

Year-to-Date Price Performance

 

Industry’s Current Valuation

On the basis of trailing twelve months price-to-sales ratio (P/S TTM), which is a commonly used multiple for valuing these small drugmakers that hardly make profits, the industry is currently trading at 2.01 compared with the S&P 500’s 2.97 and the Zacks Medical sector's 2.77.

Over the last five years, the industry has traded as high as 4.96X, as low as 1.94X, and at the median of 3.24X, as the chart below shows.

Price-to-Sales Trailing Twelve Months (TTM) Ratio

 

 

Bottom Line

Currently, investment in small- and mid-cap drugmakers may make more sense as sales at larger pharma companies are soft due to slowing product growth and increasing price pressure. However, the smaller companies also have their share of risk in the form of unstable cash flows. Also negative clinical outcome or regulatory obstacles can be huge setbacks for these smaller companies and significantly hurt their share price.

In the Medical-Drugs universe, six stocks currently sport a Zacks Rank #1 (Strong Buy), while several others have a Zacks Rank #2 (Buy). Here we discuss six stocks, which have a Zacks Rank #1. All these companies have witnessed positive earnings estimate revisions in the past 60 days.

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


BioSpecifics Technologies Corp. (BSTC - Free Report) :The Zacks Consensus Estimate for this New York based drugmaker’s 2019 EPS has been revised almost 17% upward over the past 60 days. BioSpecifics Technologies’ stock has jumped 42.7% so far this year.

Price and Consensus: BSTC

 

Eisai Co., Ltd. (ESALY - Free Report) : The stock of this leading Japanese drugmaker has risen 44.6% year to date. The Zacks Consensus Estimate EPS estimate for the 2019 has risen 8% over the past 60 days.

Price and Consensus: ESALY

 

Hikma Pharmaceuticals PLC (HKMPF - Free Report) : The stock of this U.K based maker of generic as well as branded drugs has risen 58.9% so far this year. The consensus estimate for 2019 EPS has been revised 14.8% upward over the past 60 days.

Price and Consensus: HKMPF

 

Orion Oyj (ORINY - Free Report) : Shares of this Finland based manufacturer of pharmaceuticals, active pharmaceutical ingredients (APIs), and diagnostic tests have declined 11.7% this year so far. The Zacks Consensus Estimate for 2019 EPS has been revised 8.3% upward over the past 60 days.

Price and Consensus: ORINY

 

MediWound Ltd. (MDWD - Free Report) : The Yavne, Israel based drugmaker’s stock has declined 2.1% this year so far. The Zacks Consensus Estimate for 2019’s loss has narrowed by 4.2% over the past 60 days.

Price and Consensus: MDWD

 

Cumberland Pharmaceuticals Inc. (CPIX - Free Report) : This Nashville, TN-based specialty pharma company has seen 21.4% decline in its share price this year so far. The Zacks Consensus Estimate for 2019’s loss has narrowed by almost 49% over the past 60 days.

Price and Consensus: CPIX

 

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