The pharma/biotech sector has picked up this year after being battered by the drug pricing controversy in 2016. The first half has been pretty strong for companies in the space.
The NYSE ARCA Pharmaceutical Index has risen almost 9.8% year to date (YTD) after declining almost 10% last year. NASDAQ Biotechnology Index is up 17.7% YTD after sliding 19.1% in 2016.
The sector does have its share of challenges in the form of rising competition, high profile pipeline setbacks, slowdown in growth of mature products and the loss of exclusivity for certain key drugs. Though the drug pricing issue still prevails, investors, lately, are hoping that steep pricing will not be as damaging as feared previously.
Nonetheless, strong performance of newer drugs, evolving pipelines, impressive clinical trial results, new drug approvals, continued strong performance of legacy products and rising demand are some of the factors that promise a sustained recovery in the sector.
Meanwhile, there have been many more FDA drug approvals so far this year than in 2016. A total of 23 drugs have gained FDA approval YTD, beating the total of 22 for the whole of 2016. With acceleration in the drug approval process, more innovation and a surge in new drug approvals are expected.
Though M&A activities and collaborations/deals have slowed down this year, chances are that they will pick up in the second half. With President Trump promising a major tax reform that will allow companies to bring back cash held overseas, acquisition activities are expected to pick up pace. Then again, the number of deals will still be less than the pharma industry, as it has been for many years.
Finally, the Republican administration’s vow to "repeal and replace" Obamacare bodes well for the sector’s growth.
How to Pick Likely Q2 Winners
Given the enormity of the healthcare space, selecting stocks that have the potential to beat estimates could appear to be quite daunting. But our proprietary methodology makes it fairly simple. One way to narrow down the list of choices this earnings season is by looking at stocks that have the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) – and a positive Earnings ESP. More often than not, a positive earnings surprise delivered by a company leads to stock price appreciation.
Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising with their upcoming earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Here are five healthcare stocks that are poised to beat estimates in the second quarter according to our methodology.
Our first pick is healthcare bellwether, Merck & Co., Inc. (MRK - Free Report) . This Kenilworth, NJ, based company has an Earnings ESP of +1.15% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for the second quarter is 87 cents per share. The company has consistently topped earnings expectations. In fact, Merck’s earnings surpassed expectations in each of the last four quarters, with an average positive surprise of 4.36%.
Merck is scheduled to report results on Jul 28.
Our next choice is biotech major, Celgene Corporation (CELG - Free Report) . Carrying a Zacks Rank #3, the stock has an Earnings ESP of +1.86%. The Zacks Consensus Estimate for the second quarter is pegged at $1.61 per share. This Summit, NJ-based company has a pretty impressive earnings surprise track record. The average earnings surprise over the four trailing quarters is 3.01%.
Celgene is scheduled to announce results on Jul 27.
Gilead Sciences, Inc. (GILD - Free Report) too has an impressive track record with the company consistently beating earnings expectations. The company’s earnings surpassed estimates in three of the last four quarters, with an average positive surprise of 3.52%. It looks poised to beat expectations in the second quarter as well. This Foster City, CA, based company carries a Zacks Rank #3 and has an Earnings ESP of +1.45%. The Zacks Consensus Estimate is pegged at $2.07 per share.
Gilead is scheduled to report results on Jul 26.
Seattle Genetics, Inc. (SGEN - Free Report) , a biotechnology company is another solid bet. This Zacks Rank #3 stock has an Earnings ESP of +9.30%. This Bothell, WA-based company delivered an average positive earnings surprise of 8.46% over the trailing four quarters.
Seattle Genetics is scheduled to release results on Jul 27, with the Zacks Consensus Estimate for the second quarter pegged at a loss of 43 cents per share.
A small biopharmaceutical company, Vanda Pharmaceuticals Inc. (VNDA - Free Report) makes it to our list of likely outperformers in the second quarter by virtue of its Zacks Rank #3 and an Earnings ESP of +30.0%.
The Zacks Consensus Estimate is pegged at a loss of 20 cents per share. Vanda is expected to report its results on Jul 26.
Challenges in the form of competitive and pricing pressure will remain in the healthcare sector. However, a number of companies in the space have fared well. Picking some outperformers from the space, backed by a solid Zacks Rank and a positive Earnings ESP, could lead investors to gain this earnings season.
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