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Small Drug Industry Prospects Bright Amid Coronavirus Gloom

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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: Large-Cap Pharma Stocks to Benefit in Post-Pandemic Market)

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 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 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 of the industry players.
  • 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 an equity investment is 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.

The sector’s performance was impressive in the first quarter as most of the players came up with better-than-expected sales and earnings. However, there is widespread uncertainty about the impact of the coronavirus pandemic on business, including supply chain, clinical trials, commercial operations and growth outlook. Also, R&D timelines have been impacted with some companies pausing enrollments in ongoing studies and others delaying new study starts. Though second quarter results may be severely impacted by the coronavirus pandemic, an improvement is expected in the second half. Nonetheless, 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 despite the pandemic. However, failure of key pipeline candidates in pivotal studies and 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 #21, which places it in the top 9% of 248 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, Outperforms S&P 500

The Zacks Medical-Drugs industry is a huge 171-stock group within the broader Medical sector. The industry has outperformed the S&P 500 while underperforming the Zacks Medical sector this year so far.

Stocks in this industry have collectively declined 5.5% this year, while the Zacks S&P 500 composite and the Zacks Medical sector have declined 8.1% and 2.5%, respectively.



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, the industry is currently trading at 2.21 compared with the S&P 500’s 3.18 and the Zacks Medical sector's 3.07.

Over the last five years, the industry has traded as high as 4.27X, as low as 1.71X, and at the median of 2.62X, as the chart below shows. 













Bottom Line

The smaller companies 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. However, sometimes investing in smaller innovative companies makes more sense than investing in their larger counterparts, which are plagued by generic competition for key drugs, pricing issues and rising competition.

In the Medical-Drugs universe, several stocks currently sport a Zacks Rank #1 (Strong Buy) or a Zacks Rank #2 (Buy). Here we discuss five stocks, which have a Zacks Rank #1 or 2 and have witnessed positive earnings estimate revisions in the past 60 days and stock price increases this year.

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

Avenue Therapeutics (ATXI - Free Report) : The Zacks Consensus Estimate for this New York based specialty pharma company’s 2020 loss per share has narrowed from $1.15 per share to 59 cents per share over the past 60 days. This #1 Ranked stock has risen 11.9% this year so far.

Price and Consensus: ATXI







MEI Pharma (MEIP - Free Report) : The Zacks Consensus Estimate for this San Diego based oncology biotech’s 2020 EPS has narrowed from a loss of 58 cents per share to earnings of 3 cents per share over the past 60 days. MEI Pharma’s stock has jumped 41.2% this year so far. The company has a Zacks Rank of 1.

Price and Consensus: MEIP







Minerva Neurosciences (NERV - Free Report) : The stock of this Cambridge, MA clinical stage biotech that makes drugs that treat central nervous system disease has risen 106.8% this year so far. The consensus estimate for 2020 has improved 8.1% over the past 60 days. The company has a Zacks Rank #2.

Price and Consensus: NERV







Ocular Therapeutix (OCUL - Free Report) : The stock of this Bedford, MA based ophthalmic company has risen 73.2% this year so far. The consensus estimate for 2020 has narrowed from loss of 1.37 per share to $1.23 per share over the past 60 days. The company has a Zacks Rank #2.


Price and Consensus: OCUL






Concert Pharmaceuticals (CNCE - Free Report) : The stock of this Lexington, MAbased clinical stage biotech has risen 6.6% this year so far. The consensus estimate for 2020 has narrowed from loss of $3.21 per share to $2.87 per share over the past 60 days. The company has a Zacks Rank #2.


Price and Consensus: CNCE







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