Back to top

Image: Bigstock

Small Drug Stocks Outlook: Near-Term Prospects Encouraging

Read MoreHide Full Article

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:  Large-Cap Pharmaceuticals Industry Outlook: A Recovery Ahead?)

Most of the small drugmakers have a limited portfolio of marketed drugs or in some cases no commercial-stage drugs at all. Some of these clinical stage drugmakers are dependent on just one marketed drug or pipeline candidate. For most of these companies, upfront or milestone payments from collaboration partners – in most cases their larger counterparts – are their main 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, failure of key pipeline candidates in pivotal studies, regulatory and pipeline delays 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 #75, which places it in the top 29% 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.

Our proprietary Heat Map shows that the industry’s rank has been in the top 50% of the Zacks-ranked industries over the past eight weeks.

 

 

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 S&P 500, Outperforms Sector

The Zacks Medical-Drugs industry is a huge 175-stock group within the broader Medical sector. The industry has underperformed the S&P 500 but outperformed the Zacks Medical Sector on a year-to-date basis.

While the stocks in this industry have collectively risen 11.1% year to date, the Zacks S&P 500 composite and the Zacks Medical Sector have risen 16.8% and 4.1%, respectively.

Year-to-Date Price Performance

Industry’s Current Valuation

On the basis of forward twelve months price-to-sales ratio (P/S F12M), which is a commonly used multiple for valuing these small drugmakers that hardly make profits, the industry is currently trading at 6.02 compared with the S&P 500’s 3.3 and the Zacks Medical sector's 2.71.

Over the last five years, the industry has traded as high as 6.02 X, as low as 2.18X, and at the median of 2.71X, as the chart below shows.

Price-to-Sales Forward Twelve Months (F12M) 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, generic and branded competition 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, nine 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 or 2 and have witnessed positive earnings estimate revisions and stock price increases in the past 60 days.

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

Hancock Jaffe Laboratories, Inc. (HJLI - Free Report) : The Zacks Consensus Estimate for this Irvine, CA based development stage drugmakers’ 2019 EPS has risen almost 48.7% over the past 60 days. Hancock’s stock has jumped 53.2% so far this year.

Price and Consensus: HJLI

 

 

Odonate Therapeutics, Inc. (ODT - Free Report) : The stock of this San Diego, CA based drugmaker has risen 38.3% year to date. The consensus estimate for 2019 has narrowed from loss of $4.56 to $4.44 over the past 60 days.

Price and Consensus: ODT

 

 

RecroPharma, Inc. (REPH - Free Report) : The stock of this Malvern, PAbased specialty pharmaceutical company has risen 26.7% so far this year. The consensus estimate for 2019 has narrowed from loss of $3.40 to $1.94 over the past 60 days.

Price and Consensus: REPH

 

 

Radius Health, Inc. (RDUS - Free Report) : The Waltham, MA based drugmaker’s stock has risen 32.1% this year so far. The Zacks Consensus Estimate for 2019 loss has narrowed by 0.5% over the past 60 days.

Price and Consensus: RDUS

 

 

 

Soleno Therapeutics, Inc. (SLNO - Free Report) : Shares of this Redwood City, CA based company, which makes drugs for rare diseases, have risen 20.4% this year so far. The consensus estimate for 2019 loss has narrowed from $1.12 to $1.10 over the past 60 days.

Price and Consensus: SLNO

 

 

KalVista Pharmaceuticals, Inc. (KALV - Free Report) : This Cambridge, MA-based pharma company has seen 11.7% increase in its share price this year so far. The Zacks Consensus Estimate for 2019 loss has narrowed by more than 13% over the past 60 days.

 

 

Price and Consensus: KALV

 

 

Will you retire a millionaire? 

One out of every six people retires a multimillionaire. Get smart tips you can do today to become one of them in a new Special Report, “7 Things You Can Do Now to Retire a Multimillionaire.” 

Click to get it free >>