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Forget Pfizer, Add These Big Drugmakers to Your Portfolio

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Pfizer (PFE - Free Report) , one of the biggest drugmakers in the world, is witnessing tough times in 2019. The company’s stock has declined 19.7% this year so far.

 

 

Pfizer has a Zacks Rank #5 (Strong Sell). Its earnings estimates have declined 1.7% for 2019 and 11.5% for 2020 over the past 30 days.

Pfizer lost exclusivity for its key drug Lyrica in the United States in July. Loss of exclusivity (LOE) of Lyrica and some other drugs is Pfizer’s main cause of concern in 2019. LOEs are expected to hurt 2019 sales by $2.6 billion.

In July, along with the earnings, Pfizer lowered its previously issued sales and earnings guidance for 2019 to reflect the formation of the Consumer Healthcare joint venture with Glaxo (GSK - Free Report) and the Array BioPharma acquisition.

Pfizer merged its Consumer Healthcare unit with Glaxo’s unit to form a new joint venture (JV). Pfizer owns 32% stake in the JV. In July, Pfizer bought Array BioPharma for $48 per share in cash for a total enterprise value of approximately $11.4 billion in a bid to strengthen its cancer portfolio.

Other than this business development activity, incremental negative impact of foreign exchange and unfavorable product developments in case of Prevnar (vaccine) and Xeljanz (autoimmune diseases) also resulted in the guidance cut.

In July, Xeljanz’s prescribing information in the United States was updated by the FDA to include two additional boxed warnings as well as changes to the indication and dosing for ulcerative colitis indication, following review of a post-marketing study.  Pfizer stated on the second-quarter call that the label update may have some negative impact on prescribing and hurt sales in the future quarters.

Meanwhile, due to some unfavorable revisions in Advisory Committee on Immunization Practices’ (ACIP) pneumococcal vaccination guidelines for Prevnar 13 in adults in the United States, Pfizer expects some decline in demand for Prevnar, which can hurt sales in the future quarters.

Meanwhile, Pfizer’s sterile injectables portfolio is seeing lower revenues since the past few quarters due to continued legacy Hospira product shortages in the United States. Pfizer is facing supply shortages for sterile injectable products mainly due to capacity constraints and technical issues.

Importantly, in July, Pfizer announced a definitive agreement to spin off its Upjohn unit and combine it with generic drugmaker Mylan (MYL - Free Report) in a Reverse Morris Trust transaction to create a new generic pharmaceutical company. Upjohn is Pfizer’s global, off-patent branded and generic established medicines business. The news did not go down well with investors and Pfizer’s stock declined after the announcement, probably because the drugs being divested were key cash flow generators for Pfizer and funded its R&D efforts. The divestiture of Upjohn will significantly lower Pfizer’s cash resources even though it might boost growth and also take away the Lyrica LOE cliff.

How is the Large-Cap Pharma Industry Performing?

The Zacks Large Cap Pharmaceuticals industry, comprising some of the biggest drugmakers in the world, has declined 2.1% in 2019 so far, probably due to poor performance of big names like Pfizer, Bristol-Myers and Lilly. However, the industry features in the top 11% of the 256 Zacks-ranked industries and there are many attractive investment options in the space.

We believe that new product sales ramp up as a result of rising demand, driven by growth in ageing population, successful innovation and product line extensions in important therapeutic areas, strong clinical study results, and frequent FDA approvals (26 new drugs approved so far in 2019) have helped the big drug giants to do well this year despite broader macro issues or the industry’s own challenges. The industry is likely to perform well even if the global economy slows in the remainder of the year, as is widely expected. This is because it is a defensive sector, which is almost insulated from broader macroeconomic factors. Also, the spate of pharma M&A deal announcements this year so far has provided impetus to drug stocks.

Meanwhile, most big pharma companies are resorting to restructuring activities, which is increasing their financial capacity. The funds can be used to re-stock pipelines with promising new drug candidates bought from smaller innovative drug/biotech companies.

However, the sector faces its share of headwinds like government scrutiny of high drug prices, pricing and competitive pressure, generic competition for blockbuster treatments, slowdown in sales of some of the most high-profile older drugs and most importantly major pipeline setbacks.

Nonetheless, we believe 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.

In this scenario, investing in stocks with a large market cap is a prudent move, given the fact that they control a large portion of the industry.

Here we have highlighted three bigshot drugmakers, which may prove to be good buys. All these stocks carry a Zacks Rank #1 (Strong Buy) or #2 (Buy), have outperformed the industry this year and witnessed positive estimate revisions in the past 60 days.

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

A chart showing the share price movement of the three stocks and the Large Cap Pharmaceuticals industry this year so far is given below.

 

 

3 Stocks to Buy

Merck (MRK - Free Report)

Shares of Merck have risen 13.2% this year so far. Earnings estimates for 2019 and 2020 have risen 3.2% and 1.3%, respectively over the past 60 days. Merck has a Zacks Rank #2.

A significant part of Merck’s outperformance this year so far has been driven by strong performance of its PD-1 inhibitor, Keytruda and positive regulatory updates related to it. Keytruda is continuously growing and expanding into new indications and markets globally. The drug generated sales of almost $5 billion in the first half of 2019, reflecting a massive 56.6% surge year over year.

The Keytruda development program is also progressing well with Merck spending billions for research and development of this medicine to secure more approvals in earlier lines of treatment. Undoubtedly, Keytruda has strong future growth prospects based on increased utilization, approval for new indications and expectation of additional approvals worldwide. In addition to Keytruda, Merck’s other new products, Lynparza, and Bridion are contributing meaningfully to its top line.

Merck gained FDA approval for its new combination antibacterial injection, Recarbrio, a fixed combination of relebactam with imipenem/cilastatin, and a new indication — two types of pneumonia infections — for its antibacterial medicine, Zerbaxa. It also gained several label expansion approvals for PARP inhibitor Lynparza, for which it has partnership with AstraZeneca (AZN - Free Report) .

Merck has also been on a strong footing in terms of collaborations and M&A activity. Meanwhile, Merck’s animal health and vaccine products are also performing strongly and remain core growth drivers.

Roche (RHHBY - Free Report)

Roche’s earnings estimates have increased 3.7% for 2019 and 5.3% for 2020 over the past 60 days. The company’s shares have increased 10.4% this year so far. Roche is a #1 Ranked stock.

Roche has gained regulatory approvals for label expansions of its PD-L1 inhibitor, Tecentriq, leukemia drug, Venclexta, rheumatoid arthritis drug, MabThera and hemophilia drug, Hemlibra this year. These approvals have expanded the eligible patient population for these drugs, mainly Tecentriq, which can drive sales of Roche higher in the future quarters. Earlier this month, Roche gained FDA approval for personalized medicine Rozlytrek (entrectinib) for the treatment of adults with ROS1-positive, metastatic non-small cell lung cancer.

Moreover, the pending acquisition of Spark will enable Roche to gain a foothold in the promising gene-therapy space as it faces stiff competition from biosimilars of key drugs such as Avastin, Rituxan and Herceptin. Meanwhile, the company continues to progress with its pipeline. It is looking to restructure the portfolio beyond oncology into multiple sclerosis and hemophilia, among others

Novartis (NVS - Free Report)

Novartis’ earnings estimates have increased 2.8% for 2019 and 3.1% for 2020 over the past 60 days. Novartis stock has returned 3.7% so far in 2019. Novartis has a Zacks Rank of 2.

Novartis has a strong oncology portfolio of drugs like Afinitor, Exjade, Jakavi, Zykadia, Tasigna, Promacta and Jadenu. Solid performance of new drugs like Cosentyx, Entresto and Lutathera has boosted results in recent times. The strong uptake of biosimilars boosted performance of the generic division, Sandoz, and offset the weakness in generics. New launches like Zolgensma and Piqray should further bolster performance in the second half of the year. Novartis has restructured the business to focus on becoming a core drug-focused company. The company earlier spun off its eye-care unit, Alcon, into a new company in order to grow as a medicines company solely.

Large Cap Pharmaceuticals Industry 5YR % Return

 

Large Cap Pharmaceuticals Industry 5YR % Return

Large Cap Pharmaceuticals Industry 5YR % Return

 

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