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Big Pharma Players on Strong Footing Ahead of Q4: 4 Picks

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After a rollercoaster start to the year, the drug and biotech sectors have made a remarkable recovery in the past three months.

Within this broader sector, one of the better performing industries is Large-Cap Pharmaceuticals, which includes some of the world’s largest and most recognizable drug making companies. The Large-Cap Pharmaceuticals industry features among the top 10% of the 255 Zacks-ranked industries

The Zacks Large Cap Pharmaceuticals Industry underperformed the sector it belongs to in the six months from January to June. The stocks in this industry collectively declined 5.7% in the period compared with the Zacks Medical Sector’s decline of 0.8% in the same time frame.

 

 

However, the industry recovered dramatically in the second half, rising 13% in the past three months outperforming an increase of 9.4% for the Medical sector.

 

 

We believe that strong quarterly results, consistent increases in full-year sales and earnings guidance, new product sales ramp up with rising demand, successful innovation and product line extensions, strong clinical study results, and frequent FDA approvals have brought  the sector back on growth track. Importantly, mergers and acquisitions (M&A) activity is gaining momentum with the tax reform in place.

Though headwinds like government scrutiny of high drug prices, pricing and competitive pressure, slowdown in sales of some of the most high-profile older drugs and major pipeline setbacks remain, pipeline success, cost cutting, share buybacks, product launches, increased M&A and collaboration activity and appropriate utilization of cash should keep the sector afloat through the rest of this year and next.

Moreover, investing in stocks with a large market cap is a prudent move because of the fact that they control a large portion of an industry. Given this backdrop, it makes sense to invest in some of the bigshot drugmakers.

Here we have highlighted four stocks that may prove to be good buys. All these stocks carry a Zacks Rank #2 (Buy) and have seen their share price and earnings estimates rise. You can see the complete list of today’s Zacks #1 Rank stocks here.

 

 

A chart showing the share price movement of all the four stocks in the past three months is given below.

 

 

Eli Lilly & Company (LLY - Free Report)

Lilly’s earnings estimates have increased 1.9% for 2018 and almost 2% 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 shares have increased 24.3% in the past three months.

Lilly’s new products like Trulicity, Taltz, Basaglar, Cyramza, Jardiance and Lartruvo are driving sales growth.  The company is also on a strong footing in terms of its pipeline with several positive late-stage data readouts this year along with various regulatory approvals. Important regulatory approvals so far this year include FDA approval of JAK inhibitor, Olumiant (baricitinib), label expansion of breast cancer drug, Verzenio in first-line setting and Taltz for genital psoriasis. Meanwhile, several key regulatory and pipeline events are expected in the fourth quarter and in 2019. Any positive outcome will push up share price further.

This year, Lilly also added promising new assets through business development deals including pancreatic cancer candidate, pegilodecakin, which was added with the acquisition of ARMO Biosciences. Meanwhile, the separation of its animal health unit, Elanco, via an IPO, is a prudent decision in our view as the unit was underperforming.

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

Shares of Merck have risen 16.6% in the past three months. Merck’s earnings estimates for 2018 have gone up 0.9% while that for 2019 have moved up by 2% in the past 60 days. Merck’s earnings performance has also been pretty impressive, with consistent positive surprises. The average earnings beat for the last four quarters is 5.25%.

A significant part of Merck’s outperformance this year was driven by strong performance and positive regulatory updates related to its PD-1 inhibitor, Keytruda. In a very short span of time, Keytruda has become Merck’s largest product. It is already approved for use in 12 indications across eight different tumor types in the United States. In fact, the Keytruda development program is also progressing rapidly. Several regulatory decisions for new indications in the United States as well as in Europe are due in the fourth quarter and 2019, which if approved can further boost sales.

Other than that, key recent new drug approvals include Steglatro and its fixed-dose combinations for type II diabetes, two new HIV drugs — Pifeltro and Delstrigo — containing doravirine and Prevymis (letermovir) for cytomegalovirus (CVM) infection. Merck also gained several label expansion approvals for Keytruda and another cancer drug Lynparza, which it markets in partnership with AstraZeneca (AZN). All these approvals can boost the company’s sales in future quarters.

Merck also announced positive data from several late-stage studies, mainly evaluating Keytruda for further line extensions. Merck also signed a co-development deal with Japan’s Eisai Co., Ltd for the latter’s tyrosine kinase inhibitor, Lenvima. It also agreed to buy Viralytics Limited, an Australian pharmaceutical company that develops oncolytic immunotherapies for a range of cancers, which should strengthen its oncology portfolio.

GlaxoSmithKline plc (GSK - Free Report)

Glaxo’s shares have risen 2.4% in the past three months. Glaxo’s earnings estimates for 2018 have gone up 1.4% while that for 2019 have moved up by 2.4% in the past 60 days. Glaxo’s delivered a positive earnings surprise in three of the trailing four quarters, with an average beat of 2.78%.  

We think Glaxo possesses one of the stronger late-stage pipelines in large-cap pharma and the U.K. based giant has made significant progress with its late-stage pipeline this year. Meanwhile, data from several of the late-state pipeline programs are expected in late 2018-2019. Importantly, a strong start to its three newest products — Trelegy Ellipta, Shingrix and Juluca — and acquisition of Novartis’ (NVS) stake in the Consumer Healthcare JV have strengthened Glaxo’s competitive position. In June, Glaxo bought Novartis’ 36.5% stake in their Consumer HealthCare JV for $13 billion. The deal has strengthened Glaxo’s competitive position in the market and was given a heads up by the investor community.

Bristol-Myers Squibb Company (BMY - Free Report)

Bristol-Myers’ earnings estimates have increased 1.7% for 2018 and 1.3% for 2019 over the past 60 days. The company delivered a positive earnings surprise in three of the trailing four quarters, with an average beat of 6.39%.  Bristol-Myers shares have risen 11.4% in the past three months

Bristol-Myers’ high-profile PD-L1 inhibitor, Opdivo is approved in several countries including the United States, the EU and Japan for several cancer indications. It has become a key driver of top-line growth at the drug giant along with atrial fibrillation drug, Eliquis. Meanwhile, several label expansion applications for Opdivo are under review in the United States and Europe. Potential approval will further boost the prospects of this blockbuster drug. Bristol-Myers’ other cancer drugs like Empliciti for multiple myeloma and Sprycel for different forms of leukemia are also gaining traction. Bristol-Myers is also highly active on the deal signing/acquisition front.

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