It is usually believed that that drug biotech sector is a safe haven for investors as the sector enjoys strong fundamentals.
Large Cap Pharma/Biomed/Genetics Sector vs. S&P 500
The performance of the drug/biotech space has been mixed in the past six months. The Large Cap Pharmaceuticals sector (comprising some of the biggest drugmakers in the world) has gained 9.8% compared with the S&P 500’s increase of 1.8%.
However, the riskier Medical-Biomedical and Genetics sector, which includes large as well as small biotech companies, has underperformed the S&P 500. The biotech sector has declined 3.6% against the S&P 500’s increase of 1.8%, probably because of some pipeline setbacks.
Demand driven growth in sales of new products, successful innovation and product line expansion, strong clinical study results, frequent FDA approvals, adoption of new technologies, growing demand for drugs, especially for rare-to-treat diseases, an aging population and increased health care spending are some of the factors driving this industry’s growth this year. A faster drug approval process and the proposed removal of outdated regulations, which are escalating costs and slowing down innovation, are the other positives.
Mergers and acquisitions (M&A) activity is on the rise following the tax reform. Big players are on the lookout for companies with innovative pipelines/technology. Meanwhile, in-licensing deals continue to be popular with several big companies collaborating with smaller and mid-sized players with promising mid-to-late stage pipeline candidates or interesting technology.
However, 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 are concerns for the sector.
Nonetheless, the drug/biotech sector is expected to recover from here. We believe that pipeline success, cost cutting, share buybacks, product launches, increased M&A and collaboration activity as well as appropriate utilization of cash should act in favor of the drug/biotech sector.
Q3 Earnings So Far
The drug/biotech sector’s performance has been mixed so far in the third-quarter earnings season. While many bigwigs beat estimates for earnings, they either missed the mark on sales or matched the same. Though a number of companies raised their earnings expectations, the same cannot be said about sales.
According to the Earnings Preview report, 76.7% of the Medical (includes drug, biotech as well as medical device companies) sector’s total market cap in the S&P 500 has released Q3 results. Total earnings for these Medical companies are up 11% from the year-ago quarter on 7.2% higher revenues, with 82.9% beating EPS estimates and 57.1% beating revenue estimates.
How to Pick Potential Q3 Winners?
There are still a number of drug/biotech companies poised to surpass third-quarter estimates. However, given the large number of drug/biotech firms, the task of selecting stocks with possibilities to beat could appear quite daunting.
With the help of the Zacks Stock Screener, we have zeroed in on five drug/ biotech stocks that carry a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and have a positive Earnings ESP. It is a valuable tool for investors looking for stocks that are most likely to beat earnings estimates. 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.
5 Stocks Poised to Outperform
CRISPR Therapeutics AG CRSP has an Earnings ESP of +3.53% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for third-quarter 2018 is pegged at a loss of 74 cents. The company delivered trailing four-quarter average positive earnings surprise of 19.50%. The company is expected to report results later this month.
Regeneron Pharmaceuticals Inc. REGN has an Earnings ESP of +4.65% and a Zacks Rank #3. The Zacks Consensus Estimate for third-quarter 2018 earnings is pegged at $5.21. The company beat earnings in the trailing four quarters, the average beat being 8.18%. The company is slated to release earnings on Nov 6, before market open.
Editas Medicine, Inc. EDIT has an Earnings ESP of +12.90% and a Zacks Rank #3. The Zacks Consensus Estimate for third-quarter 2018 is a loss of 72 cents. The company delivered average trailing four-quarter negative earnings surprise of 4.28%. The company is scheduled to release earnings on Nov 7, after market close.
BioDelivery Sciences International, Inc. BDSI has an Earnings ESP of +1.89% and a Zacks Rank #3. The Zacks Consensus Estimate for third-quarter 2018 loss is 13 cents. The company’s average trailing four-quarter positive earnings surprise is 2.57%. BioDelivery Sciences is scheduled to report earnings on Nov 8.
Merrimack Pharmaceuticals, Inc. MACK has an Earnings ESP of +240.74% and a Zacks Rank #2. The consensus mark for the third quarter stands at a loss of 27 cents. The company came up with average trailing four-quarter positive earnings surprise of 25.21%. Merrimack is slated to announce results on Nov 7, before market open.
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