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5 Stocks to Bet on in an Innovation-Driven Drug Industry
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The drug/biotech sector has been witnessing developments in pipeline areas like rare diseases, gene therapy and editing, and mRNA vaccines. It is expected that innovation will continue to drive growth in the industry in 2023. with advances expected to be made in areas like Alzheimer’s, cell and gene therapy, and mRNA research.
Overall, successful innovation resulting in new drug/product approvals, important advances in clinical studies and strategic collaborations with strong partners have kept small and medium-sized drug companies like Jazz Pharmaceuticals (JAZZ - Free Report) , Catalyst Pharmaceuticals (CPRX - Free Report) , Aerie Pharmaceuticals , Larimar Therapeutics (LRMR - Free Report) and Fusion Therapeutics (FUSN - Free Report) afloat.
Industry Description
The Zacks Medical-Drugs industry comprises small and some medium-sized drug companies, which make medicines for both human and veterinary use. We have a separate industry outlook discussion on some of the biggest drugmakers in the world. Most of the small drugmakers have a limited portfolio of marketed drugs or no commercial-stage drugs at all. Some of these drugmakers are dependent on just one marketed drug or pipeline candidate. For such companies, upfront or milestone payments from collaboration partners — in most cases their larger counterparts — are the main source of revenues. These companies need ample free cash flow to fund their R&D activity.
Factors Shaping the Future of the Medical-Drugs Industry
Pipeline Success: The success or failure of key pipeline candidates in clinical studies can significantly drive the stock price of industry players. Successful innovation and product line extensions in important therapeutic areas and strong clinical study results may act as important catalysts for the stocks.
Strong Collaboration Partners: These companies regularly 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 an equity investment is included in the deal. M&A deals are picking up in the sector, signaling growth.
Investment in Technology for Innovation: For these smaller companies, succeeding in a shifting global market and evolving healthcare landscape requires adopting innovative business models, investing in new technologies and increasing investments in personalized medicines. 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 the 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.
Pipeline Setbacks: The smaller companies have their share of risk in the form of unstable cash flows. Also, the failure of key pipeline candidates in pivotal studies and regulatory and pipeline delays can be huge setbacks for these smaller companies and significantly hurt their share price in the future.
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 #70, which places it in the top 28% of 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 you a few top-ranked stocks to capitalize on the thriving prospects of the small and medium-sized drugmakers’ space, let’s take a look at the industry’s recent stock-market performance and the valuation picture.
Industry Lags S&P 500 and Sector
The Zacks Medical-Drugs industry is a huge 218-stock group within the broader Medical sector. The industry has underperformed the S&P 500 and the Zacks Medical sector in the past year.
Stocks in this industry have collectively declined 28% this year so far, while the Zacks S&P 500 composite has declined 22.6%. The Zacks Medical sector has declined 22.1% in the said time frame.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing twelve months price-to-sales ratio (P/S TTM), which is a commonly used multiple for valuing these small drugmakers, the industry is currently trading at 1.69 compared with the S&P 500’s 3.41 and the Zacks Medical sector's 2.08.
Over the last five years, the industry has traded as high as 4.61X, as low as 1.57X, and at the median of 2.54X, as the chart below shows.
Trailing 12-Month Price-to-Sales (P/S) Ratio
5 Drug Stocks to Keep an Eye On
Jazz Pharmaceuticals: Dublin, Ireland-based Jazz Pharmaceuticals is a specialty biopharmaceutical company with a focus on the areas of neuroscience and oncology.
Shares of Jazz have risen 3.9% in the year so far. Earnings estimates for 2022 have risen from $17.06 to $17.35 per share over the past 90 days.The company has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Jazz’s sleep disorder portfolio looks strong with its drugs, Xyrem and Xywav to treat excessive daytime sleepiness (EDS) and cataplexy in narcolepsy patients. Apart from a strong sleep disorder portfolio, Jazz also markets four oncology drugs, older drugs Defitelio and Vyxeos and new medicines, Rylaze and Zepzelca. Jazz’s acquisition of GW Pharma diversified its commercial portfolio by adding a third high-growth commercial franchise of cannabidiol drugs like Epidiolex and Sativex to the business. Jazz’ revenues continue to benefit from strong demand for newer drugs like Xywav, Epidiolex and Rylaze. The company expects new and acquired drugs to generate 65% of revenues in 2022
Price and Consensus: JAZZ
Catalyst Pharmaceuticals: Coral Gables, FL-based Catalyst Pharmaceuticals develops and markets therapies targeting rare neurological diseases and disorders such as Lambert-Eaton Myasthenic Syndrome (LEMS), epilepsy (initially infantile spasms) and Tourette syndrome. Catalyst Pharmaceuticals’ lead drug, Firdapse, is approved to treat adult patients with LEMS, an ultra-rare disease. The drug has witnessed a solid uptake since its launch in January 2019. Catalyst’s efforts to develop Firdapse for other rare neuromuscular indications are impressive too.
The stock of Catalyst Pharmaceuticals has risen 87% this year so far. The consensus earnings estimate for 2022 has gone up from 67 cents to 70 cents over the past 90 days. The company has a Zacks Rank #1.
Price and Consensus: CPRX
Aerie Pharmaceuticals: This CA-based commercial-stage company is focused on the development and commercialization of eye disease therapies, including glaucoma and other eye diseases. It has a Zacks Rank #1.
Loss estimates for 2022 have improved from $2.01 per share to $1.82 per share over the past 90 days. The stock has risen 116.4% this year so far.
Aerie is set to be acquired by Alcon Pharmaceuticals. Aerie’s ophthalmology drugs, Rhopressa and Rocklatan, are gaining traction slowly and steadily. Their approval in additional geographies will aid overall sales. The company’s progress with the other ophthalmology candidates in its pipeline has been impressive so far and successful development of the same will boost its portfolio. Strategic buyouts bolstered the pipeline with promising candidates. Aerie’s retina programs continue to advance.
Price and Consensus: AERI
Fusion Therapeutics: This Hamilton, Canada-based clinical-stage cancer biotech makes next-generation radiopharmaceuticals as precision medicine. Loss estimates for this Zacks Rank #1 stock have narrowed from $2.12 per share to $1.90 per share over the past 90 days. The stock has declined 39.3% this year so far.
The company’s lead program, FPI-1434, targeting insulin-like growth factor 1 receptor, is currently in a phase I study. Data from the phase I study on FPI-1434 showed pre-administration of cold antibody with FPI-1434 increased tumor binding. Two other candidates, FPI-1966, targeting the fibroblast growth factor receptor 3 (FGFR3), and FPI-2059, a small molecule targeting neurotensin receptor 1 (NTSR1), are also in phase I. Fusion Therapeutics has a multi-program partnership with AstraZeneca and another collaboration with Merck to evaluate FPI-1434 in combination with Merck's Keytruda in patients with solid tumors expressing IGF-1R.
Price and Consensus: FUSN
Larimar Therapeutics: CA-based Larimar Therapeutics is a clinical-stage company making medicines for rare diseases. Its lead pipeline candidate is CTI-1601, being developed as a potential treatment for Friedreich's ataxia (FA). The CTI-1601 program was placed on clinical hold by the FDA in May 2021 following deaths in the high-dose arms in a pre-clinical toxicology study that was designed to support extended dosing of patients with CTI-1601. Larimar Therapeutics plans to submit a complete response to the CTI-1601 clinical hold this year, which it believes will allow clinical studies to begin on the candidate. In conjunction with the complete response, Larimar proposes a phase II four-week dose exploration study in FA patients as CTI-1601’s next clinical study.
Prior phase I results on CTI-1601 provided clinical proof-of-concept for the candidate by demonstrating its ability to increase frataxin levels in peripheral tissues. CTI-1601 has been granted Rare Pediatric Disease designation, Fast Track designation and Orphan Drug designations by the FDA
The stock of Larimar Therapeutics has declined 68% this year so far. The consensus estimate for 2022 loss has narrowed from $2.45 per share to $1.88 per share over the past 90 days. The company has a Zacks Rank #1.
Price and Consensus: LRMR
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5 Stocks to Bet on in an Innovation-Driven Drug Industry
The drug/biotech sector has been witnessing developments in pipeline areas like rare diseases, gene therapy and editing, and mRNA vaccines. It is expected that innovation will continue to drive growth in the industry in 2023. with advances expected to be made in areas like Alzheimer’s, cell and gene therapy, and mRNA research.
Overall, successful innovation resulting in new drug/product approvals, important advances in clinical studies and strategic collaborations with strong partners have kept small and medium-sized drug companies like Jazz Pharmaceuticals (JAZZ - Free Report) , Catalyst Pharmaceuticals (CPRX - Free Report) , Aerie Pharmaceuticals , Larimar Therapeutics (LRMR - Free Report) and Fusion Therapeutics (FUSN - Free Report) afloat.
Industry Description
The Zacks Medical-Drugs industry comprises small and some medium-sized drug companies, which make medicines for both human and veterinary use. We have a separate industry outlook discussion on some of the biggest drugmakers in the world. Most of the small drugmakers have a limited portfolio of marketed drugs or no commercial-stage drugs at all. Some of these drugmakers are dependent on just one marketed drug or pipeline candidate. For such companies, upfront or milestone payments from collaboration partners — in most cases their larger counterparts — are the main source of revenues. These companies need ample free cash flow to fund their R&D activity.
Factors Shaping the Future of the Medical-Drugs Industry
Pipeline Success: The success or failure of key pipeline candidates in clinical studies can significantly drive the stock price of industry players. Successful innovation and product line extensions in important therapeutic areas and strong clinical study results may act as important catalysts for the stocks.
Strong Collaboration Partners: These companies regularly 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 an equity investment is included in the deal. M&A deals are picking up in the sector, signaling growth.
Investment in Technology for Innovation: For these smaller companies, succeeding in a shifting global market and evolving healthcare landscape requires adopting innovative business models, investing in new technologies and increasing investments in personalized medicines. 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 the 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.
Pipeline Setbacks: The smaller companies have their share of risk in the form of unstable cash flows. Also, the failure of key pipeline candidates in pivotal studies and regulatory and pipeline delays can be huge setbacks for these smaller companies and significantly hurt their share price in the future.
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 #70, which places it in the top 28% of 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 you a few top-ranked stocks to capitalize on the thriving prospects of the small and medium-sized drugmakers’ space, let’s take a look at the industry’s recent stock-market performance and the valuation picture.
Industry Lags S&P 500 and Sector
The Zacks Medical-Drugs industry is a huge 218-stock group within the broader Medical sector. The industry has underperformed the S&P 500 and the Zacks Medical sector in the past year.
Stocks in this industry have collectively declined 28% this year so far, while the Zacks S&P 500 composite has declined 22.6%. The Zacks Medical sector has declined 22.1% in the said time frame.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing twelve months price-to-sales ratio (P/S TTM), which is a commonly used multiple for valuing these small drugmakers, the industry is currently trading at 1.69 compared with the S&P 500’s 3.41 and the Zacks Medical sector's 2.08.
Over the last five years, the industry has traded as high as 4.61X, as low as 1.57X, and at the median of 2.54X, as the chart below shows.
Trailing 12-Month Price-to-Sales (P/S) Ratio
5 Drug Stocks to Keep an Eye On
Jazz Pharmaceuticals: Dublin, Ireland-based Jazz Pharmaceuticals is a specialty biopharmaceutical company with a focus on the areas of neuroscience and oncology.
Shares of Jazz have risen 3.9% in the year so far. Earnings estimates for 2022 have risen from $17.06 to $17.35 per share over the past 90 days.The company has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Jazz’s sleep disorder portfolio looks strong with its drugs, Xyrem and Xywav to treat excessive daytime sleepiness (EDS) and cataplexy in narcolepsy patients. Apart from a strong sleep disorder portfolio, Jazz also markets four oncology drugs, older drugs Defitelio and Vyxeos and new medicines, Rylaze and Zepzelca. Jazz’s acquisition of GW Pharma diversified its commercial portfolio by adding a third high-growth commercial franchise of cannabidiol drugs like Epidiolex and Sativex to the business. Jazz’ revenues continue to benefit from strong demand for newer drugs like Xywav, Epidiolex and Rylaze. The company expects new and acquired drugs to generate 65% of revenues in 2022
Price and Consensus: JAZZ
Catalyst Pharmaceuticals: Coral Gables, FL-based Catalyst Pharmaceuticals develops and markets therapies targeting rare neurological diseases and disorders such as Lambert-Eaton Myasthenic Syndrome (LEMS), epilepsy (initially infantile spasms) and Tourette syndrome. Catalyst Pharmaceuticals’ lead drug, Firdapse, is approved to treat adult patients with LEMS, an ultra-rare disease. The drug has witnessed a solid uptake since its launch in January 2019. Catalyst’s efforts to develop Firdapse for other rare neuromuscular indications are impressive too.
The stock of Catalyst Pharmaceuticals has risen 87% this year so far. The consensus earnings estimate for 2022 has gone up from 67 cents to 70 cents over the past 90 days. The company has a Zacks Rank #1.
Price and Consensus: CPRX
Aerie Pharmaceuticals: This CA-based commercial-stage company is focused on the development and commercialization of eye disease therapies, including glaucoma and other eye diseases. It has a Zacks Rank #1.
Loss estimates for 2022 have improved from $2.01 per share to $1.82 per share over the past 90 days. The stock has risen 116.4% this year so far.
Aerie is set to be acquired by Alcon Pharmaceuticals. Aerie’s ophthalmology drugs, Rhopressa and Rocklatan, are gaining traction slowly and steadily. Their approval in additional geographies will aid overall sales. The company’s progress with the other ophthalmology candidates in its pipeline has been impressive so far and successful development of the same will boost its portfolio. Strategic buyouts bolstered the pipeline with promising candidates. Aerie’s retina programs continue to advance.
Price and Consensus: AERI
Fusion Therapeutics: This Hamilton, Canada-based clinical-stage cancer biotech makes next-generation radiopharmaceuticals as precision medicine. Loss estimates for this Zacks Rank #1 stock have narrowed from $2.12 per share to $1.90 per share over the past 90 days. The stock has declined 39.3% this year so far.
The company’s lead program, FPI-1434, targeting insulin-like growth factor 1 receptor, is currently in a phase I study. Data from the phase I study on FPI-1434 showed pre-administration of cold antibody with FPI-1434 increased tumor binding. Two other candidates, FPI-1966, targeting the fibroblast growth factor receptor 3 (FGFR3), and FPI-2059, a small molecule targeting neurotensin receptor 1 (NTSR1), are also in phase I. Fusion Therapeutics has a multi-program partnership with AstraZeneca and another collaboration with Merck to evaluate FPI-1434 in combination with Merck's Keytruda in patients with solid tumors expressing IGF-1R.
Price and Consensus: FUSN
Larimar Therapeutics: CA-based Larimar Therapeutics is a clinical-stage company making medicines for rare diseases. Its lead pipeline candidate is CTI-1601, being developed as a potential treatment for Friedreich's ataxia (FA). The CTI-1601 program was placed on clinical hold by the FDA in May 2021 following deaths in the high-dose arms in a pre-clinical toxicology study that was designed to support extended dosing of patients with CTI-1601. Larimar Therapeutics plans to submit a complete response to the CTI-1601 clinical hold this year, which it believes will allow clinical studies to begin on the candidate. In conjunction with the complete response, Larimar proposes a phase II four-week dose exploration study in FA patients as CTI-1601’s next clinical study.
Prior phase I results on CTI-1601 provided clinical proof-of-concept for the candidate by demonstrating its ability to increase frataxin levels in peripheral tissues. CTI-1601 has been granted Rare Pediatric Disease designation, Fast Track designation and Orphan Drug designations by the FDA
The stock of Larimar Therapeutics has declined 68% this year so far. The consensus estimate for 2022 loss has narrowed from $2.45 per share to $1.88 per share over the past 90 days. The company has a Zacks Rank #1.
Price and Consensus: LRMR