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Large Cap Pharma Stocks Staging a Comeback in Second Half

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The large cap pharma industry has got its mojo back as expected. The space struggled in early part of the year. The Zacks Large-Cap Pharma industry, a 14 medical stock group, which was down 5.1% in the first half of 2018, has rallied 9.3% since June end. The industry has outperformed the broader S&P 500’s increase of 6.4% in the said period. This industry also features among the top 38% of the 256 Zacks-ranked industries. Over the last decade, the top half beat the bottom half by a factor of more than 2 to 1.

The beginning of the year was marred by instability in the U.S. market, a few negative updates on the pipeline and regulatory front, and confusion over new drug policy to curb price hikes. However, strong earnings momentum over the past two quarters boosted investors’ confidence in the industry.

Moreover, the tax reform announced late last year also had a favorable impact on large-cap pharma companies as it lowered their tax liability and boosted their cash position through low tax on repatriation. This spurred mergers and acquisitions in the Pharma/biotech sectors. Some large-cap companies have acquired smaller biotechs to boost their pipeline with new technologies and rare disease drugs.

 

We believe earnings will continue to increase in the second half as several companies raised their full-year guidance on their second-quarter conference calls. Moreover, rising demand for new drugs, product line extensions, strong clinical study results and frequent FDA approvals have boosted the prospects of the sector.

Here we present four companies from the large-cap pharma space whose prices have rallied so far in the second half and have outperformed the Zacks Large Cap Pharma industry since June end.

Eli Lilly & Company (LLY - Free Report)

Lilly’s stock has rallied 23.9% since June end, the highest among the 14 stocks in the large cap sector. The company carries a Zacks Rank #2 (Buy). Lilly’s earnings estimates have increased 6.2% for 2018 and 4% for 2019 over the past 60 days. The company delivered a positive earnings surprise in each of the trailing four quarters, with an average beat of 10.15%.

Lilly’s sales have risen so far this year on the back of new drugs like Trulicity, Taltz, Basaglar, Cyramza, Jardiance and Lartruvo. The company also boasts a strong pipeline and has announced several positive late-stage study data readouts and received regulatory approvals so far this year. The approval for JAK inhibitor, Olumiant (baricitinib), and label expansion of breast cancer drug, Verzenio in the first-line setting are some of the important milestones. Similar announcements are scheduled for the rest of the year. Any positive outcome will  drive the stock further.

Pfizer (PFE - Free Report)

Shares of Pfizer have increased 15.4% since June end and the company holds a Zacks Rank #3 (Hold). Earnings estimates have increased 1% for 2018 and 0.3% for 2019 over the past 60 days. The company delivered a positive earnings surprise in each of the trailing four quarters, with an average beat of 6.46%.

Although the company’s legacy drugs are facing declining sales due to loss of exclusivity, these were offset by strong performance of key brands like Ibrance, Eliquis and Xeljanz. Pfizer’s newest immunotherapy, Bavencio, which is approved for metastatic Merkel cell carcinoma and urothelial carcinoma is considered a significant top-line driver. The company gained approvals for label expansion of Xtandi in non-metastatic prostate cancer in the United States and for biosimilar version of Roche’s cancer drug, Herceptin, in Europe in July.

Pfizer is focused on expanding the label of already approved drugs like Ibrance and Xtandi as well as getting approvals for new drugs. There are four candidates under review in the United States for various oncology indications with decisions expected later this year.

Merck & Co., Inc. (MRK - Free Report)

Merck’s shares have risen 13.1% since June end. It carries a Zacks Rank #3. Earnings estimates have increased 0.9% for 2018 and 0.8% for 2019 over the past 60 days. The company delivered a positive earnings surprise in each of the trailing four quarters, with an average beat of 5.25%.

The company’s anti-PD-1 therapy, Keytruda, is one of the best performing drugs in the oncology segment generating sales over $3 billion in the first half of 2018. Merck continues to evaluate the drug in several clinical studies for more than 30 types of cancer. In July, the CHMP adopted a positive opinion for approval of a Keytruda combination regimen as a treatment for the first-line non-squamous non-small cell lung cancer.

The company also has many pipeline candidates in advanced stages of development targeting multiple disease areas. Two HIV treatments containing doravirine – Delstrigo and Pifeltro – received approval in the United States in August. The positive developments should continue to drive sales higher, which boost the prospects of the company.

Johnson and Johnson, Inc. (JNJ - Free Report)

J&J’s stock has rallied 12% since June end. The company carries a Zacks Rank #3. Earnings estimates have increased 6.2% for 2018 and 4% for 2019 over the past 60 days. The company delivered a positive earnings surprise in each of the trailing four quarters, with an average beat of 10.15%.

The company’s sales growth has been accelerating since second half of 2017 on the back of strong performance of Pharmaceutical unit and improving sales in Medical Devices unit. The company has already raised its organic sales guidance for 2018 twice this year.

J&J’s new drugs like Imbruvica, Xarelto and Darzalex hold potential and are offsetting declining sales of its legacy drugs. The company is also focused on label expansion of several of its approved drugs. The company has quite a few late stage candidates in its pipeline. It submitted a regulatory application in the United States, seeking approval of esketamine nasal spray as a medication for treatment-resistant depression, earlier this month. In July, the company received approval for single-tablet HIV treatment, Symtuza.

Others Catching Up With the Trend

Apart from these four companies, Bristol-Myers (BMY - Free Report) and Roche (RHHBY - Free Report) have also outperformed the industry since June end. We expect the positive trend to continue through the year progresses.

Concerns for the Sector

Headwinds that can put pressure on the space are drug pricing scrutiny, pricing and competitive pressure and major pipeline setbacks. Most importantly, a slowdown in sales of some of the most high-profile older drugs, courtesy of payers and competitive pressure from both branded and generic drugs, is a concern for the sector.

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