Rocked by scandals and facing greater political scrutiny, the pharmaceutical industry faces one of its steepest challenges in recent memory. With a critical earnings test looming over the horizon, the stakes couldn’t get any higher. For investors, that puts them in tricky territory. Pharma stocks, despite noteworthy improvements over the summer, are mostly in negative territory.
The benchmark exchange-traded fund SPDR S&P Pharmaceuticals (ETF) (NYSEARCA:XPH) is down 8% year-to-date. Should investors cut their losses? Or can the rally break down upside resistance?
Pricing policies and questionable business tactics have come under fire in the wake of skyrocketing health care costs. It’s an issue that has long caused gridlock in Washington. Undoubtedly, the heated debate will carry over into the equally heated U.S. presidential race. But for pharma stocks, the concern is more perception than politics. Regardless of which side is responsible for the stalemate, the bottom line is that the American people are angry. That anger has often translated to lost opportunities and sinking valuations for pharma stocks.
While it’s tempting to view Big Pharma as a lost cause, there’s also reason for optimism. In the past month, the XPH ETF is up 10%, and in the trailing 90-day period, it has gained nearly 21%. Those performances are hard to deny for potential buyers of pharma stocks. More importantly, these numbers were achieved just ahead of much anticipated earnings releases. It’s unlike Wall Street to aspire to lose money, so a rally in pharma stocks wouldn’t be out of the question.
The question is: can troubled pharmaceuticals that either have courted the lion’s share of criticism or have fallen on rough times recover? The following three pharma stocks just might pull off a surprise during earnings season.
Troubled Pharma Stocks to Buy: Valeant Pharmaceuticals Intl Inc. (VRX)
When it comes to troubled pharma stocks, Valeant Pharmaceuticals Intl Inc. (NYSE:VRX) could write the book. Both Valeant and Turing Pharmaceuticals AG — made infamous for its former CEO Martin Shkreli — were under fire from a Congressional committee for putting profits ahead of patient care.
As a result, VRX stock took a life-threatening beating this year. The present losses also extended a horrific nightmare that was the second half of 2015.
To no one’s surprise, VRX stock missed expectations for the fourth quarter of fiscal year 2015, and for Q1 FY2016. As a result, the earnings-per-share forecast is muted for Q2 at $1.48, down 40% from the year-ago quarter. Fundamentally, VRX stock could benefit from more than just a lowered bar. Exciting product pipelines raise the potential for vastly improved sales, drawing one analyst to bump up the price target for VRX stock significantly.
Yet the possibility of a post-earnings boost is best evidenced by the technical argument. Following the Q4 miss, VRX stock dropped 37% for the day. After Q1, shares gapped-down 15% from the prior session. For the day, VRX stock lost only 3%. That’s a major paring of losses that shouldn’t be overlooked. It also indicates that investors are sensing a bottom in VRX stock.
It may not reach its all-time highs any time soon, but even getting half its zenith would be a major boon for VRX stock.
Troubled Pharma Stocks to Buy: Infinity Pharmaceuticals Inc. (INFI)
Another name among hard-hit pharma stocks is Infinity Pharmaceuticals Inc. (NASDAQ:INFI). Already flirting with penny stock prices late last year, INFI stock made it official a few months ago on June 14.
After the company disclosed that its non-Hodgkin’s lymphoma drug, duvelisib, had an efficacy rate lower than that of competitor offerings, INFI stock went into freefall. Adding insult to injury, Infinity stated that they were eliminating their research team, effectively slashing their head count by 21%.
The disappointing results led to one of the sharpest analyst reversals for pharma stocks. Prior to the disclosure, a vast majority of shot-callers had bullish recommendations for INFI stock. Afterwards, only one held out. The pessimism is also evident in terms of financial expectations; with the EPS consensus target for Q2 a subterranean loss of $0.89. Aside from the target itself, the key to success for INFI stock may be its balance sheet — namely, no debt and a relatively healthy cash account.
As with Valeant, the bullish case for INFI stock is best explained through the technicals: Since July 6, shares have been steadily gaining inside an inclined trend channel. Over the trailing 30-day period, INFI stock is up almost 30%. Whether that’s enough for most investors to overcome a 78% year-to-date loss remains to be seen. But given the steepness of the decline, there should be at least a few contrarian traders willing to take the gamble.
Admittedly, INFI stock is extremely speculative. Nevertheless, a little bit of positive news could go a long way for Infinity.
Troubled Pharma Stocks to Buy: Portola Pharmaceuticals Inc. (PTLA)
Compared to other underperforming pharma stocks, Portola Pharmaceuticals Inc. (NASDAQ:PTLA) strikes a nice balance — bad, but not terrifyingly so. PTLA stock is also the best performing among the featured pharma stocks, down 47% YTD.
Although it’s a dubious honor, there’s a very real reason why Portola has escaped the worst of pharmaceutical volatility — andexanet alfa. This breakthrough therapy could be a life-saving intervention for patients treated with Factor Xa inhibitors. Best of all for PTLA stock, there’s currently no alternative.
The unprecedented nature of the andexanet alfa therapy explains why speculators are willing to risk money on an otherwise unprofitable venture. Earnings for PTLA stock haven’t been in positive territory since FY 2012. That trend is unlikely to reverse in the immediate time frame. For its upcoming Q2 report, PTLA stock is pegged for an EPS loss of $1.20 per share, towards the lower end of the range of estimates. However, if the Xa inhibitor therapy breaks into the market, the sky really is the limit.
The battle between bulls and bears is quite evident in the technical charts. Yes, PTLA stock took a beating in the first three months of the year. But in the trailing 90 days, PTLA stock has gained back nearly 27%. It’s not just a matter of price statistics. Market analysts have also noted that Portola’s momentum is backed by higher-than-usual volume. That suggests the big money is giving PTLA more than a fighting chance to redeem itself.
Although it fell apart earlier this year, PTLA stock is backed by one of the most compelling stories within the pharmaceutical industry.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.