In spite of a strong start in 2018, the pharma/biotech industry is struggling currently, presumably due to a shift in focus to lowering of high drug prices and faster approval of generics. Moreover, quite a few negative pipeline and regulatory updates announced this year so far have probably had an unfavorable impact on the industry.
However, we expect the industry to turn around as the year progresses. Demand for drugs is rising worldwide due to increasing ailing and elderly population, frequent approval of new drugs as well as line extensions of already marketed drugs, and increased healthcare spending.
Moreover, reduction in tax and one-time low tax window for cash repatriation has boosted the cash position of large pharma companies. This has led to an increase in merger & acquisition activity and may boost innovation and capital building in the biotech industry. With the $62 billion price tag, the proposed acquisition of Shire plc (SHPG - Free Report) by Japanese-firm Takeda is the biggest deal in the industry. Earlier in the year, we have seen Sanofi (SNY - Free Report) and Celgene Corporation (CELG - Free Report) acquiring smaller biotech companies. Impax Laboratories merged with Amneal. Other large pharma companies are also on the lookout for acquisition targets.
Why Large Caps?
Given the current dampening mood, we focus on some large-cap companies to lower portfolio risk.
Putting your money in large-cap companies reduces risk due to their diversified portfolio and a large cash base. Moreover, the companies' stability and dividend payments provide a safety cushion to one’s portfolio. Moreover, in a flat or downtrend market, it is better to focus on specific stocks. Large caps also give high returns and are less risky than small and mid-caps.
However, the large-cap pharma industry is down 4.5% so far this year while the S&P 500 has risen 2.3%. But the large-cap industry ranks among the top half of the 255 Zacks industry list.
The below mentioned stocks have risen this year so far, outperforming the large-cap pharma industry. Let’s discuss the factors driving these stocks and why one should add them to their portfolio.
AstraZeneca (AZN - Free Report) shares have gained 6% so far this year on the back of several regulatory approvals and successful study results this year.
The company’s Lynparza became the first PARP inhibitor to be approved beyond ovarian cancer as the FDA approved its label expansion in metastatic breast cancer. Another cancer drug, Imfinzi’s label was expanded to include advanced non-small cell lung cancer (“NSCLC”) indication. Tagrisso’s eligible patient population was expanded recently as it is now approved for treating first-line NSCLC with EGFR mutations.
Apart from cancer drugs, AstraZeneca’s asthma drug, Fasenra, received approval in Europe for severe eosinophilic asthma. Moreover, the company added a new drug to its portfolio with the approval of Lokelma (formerly known as ZS-9) for hyperkalemia
AstraZeneca’s triple combination therapy, PT010, for the treatment of chronic obstructive pulmonary disease (“COPD”) significantly improved several lung functions compared with dual combination therapies – per data from a late-stage KRONOS study.
These approvals for new drugs as well as line extensions are likely to boost the company’s top line in the future quarters. In addition, a regulatory application seeking label expansion of Forxiga as an oral adjunct treatment to insulin in adults with type-1 diabetes was accepted for review in March in Europe. Thus, we expect the stock’s momentum to continue. However, negative regulatory updates or data readouts may impact the stock unfavorably, key among them being the final overall survival data from MYSTIC study, which has already been delayed.
Merck & Co., Inc. (MRK - Free Report) stock has gained 7.6% so far this year backed by encouraging data from several clinical studies evaluating Keytruda as well label expansions of the drug.
Keytruda received approval for treating urothelial carcinoma in Japan. Moreover, label expansion in advanced cervical cancer is under review in the United States. Several other regulatory decisions are pending in the United States as well as Europe.
The drug has shown encouraging development in clinical studies. Keytruda significantly improved recurrence-free survival (“RFS”) in melanoma patients and overall survival (“OS”) in NSCLC patients as monotherapy. In combination with Eli Lilly’s Alimta, Keytruda improved overall survival (“OS”) and progression-free-survival (“PFS”) in first-line NSCLC. These positive data readouts increase the probability of Keytruda’s label expansion..
Moreover, data readouts from a few clinical studies evaluating Keytruda, including two pivotal lung cancer studies, presented at the annual meeting of the American Society of Clinical Oncology (ASCO) in Chicago were also encouraging.
Apart from Keytruda, Merck’s anti-cancer drug, Lenvima, was approved in Japan for label expansion in first-line hepatocellular carcinoma (“HCC”), a type of liver cancer. Moreover, label expansion of AstraZeneca’s Lynparza in breast cancer will also boost Merck’s revenues as the latter shares development and commercialization costs as well as sales with AstraZeneca.
Meanwhile, Merck’s immunotherapy pipeline for cancer treatment is expected to get a boost with the completion of the acquisition of Australian Firm, Viralytics Limited, in the second quarter. We expect growth of new drugs to continue, which will offset the loss of sales of certain products due to loss of market exclusivity. This should drive the company’s shares higher going forward.
GlaxoSmithKline plc’s (GSK - Free Report) influenza vaccine – FluarixQuadrivalent – got approval for label expansion in infants six months or older in the United States and Europe. HIV treatment, Juluca, was approved in Europe. Moreover, the company’s shingles vaccine nears approval in Europe as in January the Committee for Medicinal Products for Human Use adopted a positive opinion for the marketing authorization application. In May, the FDA approved the label expansion of asthma therapy, Arnuity Ellipta, as a maintenance treatment in pediatric patients aged five years and older.
Moreover, the approval of three new products – Trelegy Ellipta, Shingrix and Juluca – in quick succession in the United States and Europe last year/early this year boosted the company’s top line as the drugs’ uptake was encouraging.
In addition, the agreement to acquire Novartis’ (NVS - Free Report) stake in the Consumer Healthcare JV is likely to strengthen its competitive position.
The stock has rallied 14.9% so far this year.
AstraZeneca, Merck and Glaxo are all Zacks Rank #3 (Hold) stocks. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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