The financial markets have been very fickle this year, and none more so than the major pharmaceuticals. Across the Pacific, Japan’s Astellas Pharma Inc. (OTCMKTS:ALPMY) jump started a lethargic Nikkei 225 index with strong, first-half operating profits. The company was further emboldened by regulatory approval for its cancer-fighting drug. But here in the U.S., the roles are flipped. The benchmark S&P 500 is up, while Big Pharma stocks have turned into a critical laggard in late summer.
It’s hard not to feel at least a little bit uneasy. Exchange-traded funds that hold Big Pharma stocks just haven’t done well at all.
Year-to-date, the PowerShares Dynamic Pharmaceuticals(ETF) (NYSEARCA:PJP) — which includes powerhouses like Gilead Sciences, Inc. (NASDAQ:GILD) and Amgen, Inc. (NASDAQ:AMGN) — is down 16%. Similar losses are seen in the iShares U.S. Pharmaceuticals ETF (NYSEARCA:IHE) and the SPDR S&P Pharmaceuticals (ETF) (NYSEARCA:XPH).
Pharma stocks are notoriously unpredictable. Quite frequently, a poorly received clinical trial for a key drug or therapy supersedes any optimism in the fundamental or technical picture. This dynamic is more pronounced in smaller companies, but Big Pharma is no exception to this rule.
However, what we’re witnessing is more like an epidemic. The aforementioned GILD and AMGN are in negative territory for the year, the former especially so. Even the king of Big Pharma stocks, Pfizer Inc. (NYSE:PFE), is barely treading water. And since the beginning of August, PFE shares have lost 13% in the markets.
I could go on, but the bottom line is that it has been an ugly second-half period for drug makers. Here are three Big Pharma stocks that face increasing pressure.
Big Pharma Stocks to Sell: Bristol-Myers Squibb Co (BMY)
Bristol-Myers Squibb Co (NYSE:BMY) is a prime example of why I have a love-hate relationship with pharma stocks. BMY has solid fundamentals, with strong profitability margins and a return on equity ratio that beats out a majority of the competition.
Management has also brought in tighter financial controls, reducing debt levels and other liabilities. Better yet, BMY has been on a long earnings streak, and it did not disappoint in the second quarter of fiscal year 2016.
Then it happened. Just days after the Q2 report, BMY revealed that Opdivo — its lung-cancer fighting drug — failed to meet efficacy standards in a late-stage trial. That was a huge blow to BMY, which has been making substantial inroads to immunotherapy solutions. This new-wave medical technology is responsible for the development of Opdivo and similar drugs. From a financial perspective, Bristol-Myers placed big bets that Opdivo would transition to a first-line treatment for lung cancer.
It’s safe to say that Wall Street was completely caught off-guard. Evercore ISI analyst Mark Schoenebaum noted that investors had “high expectations” for the Opdivo trial. Instead, BMY stumbled 34% to where it is today. Technically, the situation is a lot worse. The volatility has knocked Bristol-Myers off multiple support levels, and sentiment is absolutely fearful.
Although I don’t doubt that BMY will make a comeback, Big Pharma stocks are all under the gun. The smart idea would be to cut your losses and wait for a clearer sign to reengage.
Big Pharma Stocks to Sell: Merck & Co., Inc. (MRK)
Among Big Pharma stocks, a disaster for one company could very well spell opportunity for another. And who else would be better positioned to take advantage of Bristol-Myers’ woes than Merck & Co., Inc. (NYSE:MRK)?
They both have similar financials in terms of profit margins, return on equity and general stability of the balance sheet. Prior to the Opdivo disaster, MRK and BMY had reasonably equitable market capitalization. Now, it’s not even close. So why isn’t MRK stock pushing higher?
On paper, the situation doesn’t make a whole lot of sense. MRK produces Keytruda, the top competitor to Opdivo. The primary reason why the latter failed was because it cast a wider net in terms of patient eligibility. That increases the overall coverage of Opdivo, greatly improving odds that it could become a front-line treatment for lung cancer. At the same time, there’s a higher risk of clinical failure. Merck took a cautious approach with Keytruda, limiting trial patients to specific criterion.
The conservative approach looked like it was paying off.
MRK stock jumped over 10% immediately after the BMY disclosure. Better yet, Merck beat earnings estimates for Q3 FY2016, and shares popped up 2% for the day. But Keytruda sales slipped notably from forecast. Also, MRK is still technically in a downtrend following its rival’s misstep. This contradiction doesn’t sit well for those trying to make sense of Big Pharma stocks.
While Bristol-Myers’ is getting punished for being too aggressive, Merck isn’t gaining much ground due to its passiveness.
Big Pharma Stocks to Sell: Eli Lilly and Co (LLY)
Arguably, the biggest surprise of 2016 in Big Pharma stocks is the Opdivo drug failure. However, a candidate for second-biggest surprise could be the lack of momentum among fierce competitors. In that regard, Eli Lilly and Co (NYSE:LLY) should be doing a lot better than where it is now.
The majority of covering analysts for LLY are overwhelmingly bullish. Furthermore, several investment firms have called for Eli Lilly to hit triple-digit prices.
Sentiment aside, oncology is a hot market for pharma stocks. Within that broad sector, proposed therapies for lung cancer and sarcoma have generated significant press. What MRK and BMY are to lung cancer, LLY is to sarcoma. Since Wall Street is now anxious for good news, Eli Lilly has a chance to step it up and impress. The company is also supported by a series of promising product pipelines, including Solanezumab, a drug for Alzheimer’s disease.
But with so much working in their favor, LLY stock hasn’t shown much moxy. On a YTD basis, shares are down 9%, with many of the losses coming in the last two weeks. This is in sharp contrast to the over 23% returns given to Eli Lilly shareholders last year. Also, its recent Q3 FY2016 earnings report did the company no favors, missing revenue and earnings estimates badly.
Certainly, it’s not over for LLY. However, investors are getting jittery with Big Pharma, and the mixed messages don’t inspire confidence.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.