The past few months have been pretty rough for the healthcare sector, with the drug pricing issue taking the center stage once again.
This time, it was the massive price hike of Mylan NV’s (MYL) severe allergy treatment, EpiPen that sparked controversies. With no possibility of dying down any time soon, the company has drawn flak from lawmakers, consumers and the common people alike.
Presidential candidate Hillary Clinton’s tweet on the issue made matters worse, which was followed by her proposal of a health care plan to keep drug prices under control, protect consumers from unjustified drug price hikes and increase the accountability of drug manufacturers.
Deals, Product Approvals & Zika Virus
Despite all these negative developments, mergers and acquisitions, and licensing deals continued to make it to the headlines.
German drug maker, Bayer AG (ADR) (BAYRY) and U.S. seed behemoth Monsanto Company (MON) have finally reached an agreement under which the latter will be acquired by the former in an all-cash deal valued at about $66 billion. While biotech company Horizon Pharma PLC (HZNP) acquired California-based Raptor Pharmaceutical Corp. (RPTP), Pfizer Inc. (PFE) took over oncology-focused company Medivation Inc (MDVN) for approximately $14 billion.
Allergan plc Ordinary Shares (AGN) continued with its acquisition spree. In Oct 2016, Allergan announced the intention to acquire Motus Therapeutics, Inc., a wholly-owned subsidiary of Rhythm Holding Company. The acquisition should be completed by the year end. Note that Allergan announced a string of small bolt-on acquisitions in Sep 2016 to expand its presence in the highly lucrative non-alcoholic steatohepatitis space.
Collaborations between large-cap and development-stage companies are being seen mostly in the immuno-oncology space, and to some extent in other therapeutic areas like autoimmune and cardiovascular.
Additionally, new product approvals, along with the label expansion of existing drugs and regular pipeline updates kept investors glued to the sector.
While Eli Lilly and Company (LLY) gained accelerated approval in the U.S. for Lartruvo, in combination with doxorubicin, for the first-line treatment of soft tissue sarcoma, Sarepta Therapeutics Inc (SRPT) received a huge boost with the same for Exondys 51 for the treatment of Duchenne muscular dystrophy.
Meanwhile, Roche Holding Ltd.’s (ADR) (RHHBY) immuno-oncology drug Tecentriq was granted FDA approval for an additional indication, this time for the treatment of metastatic non-small cell lung cancer.
Let us now come to biosimilars, which are being touted as the next big thing in the health care sector. Among the approved biosimilars in the U.S. are Novartis AG’s Erelzi (a biosimilar version of Amgen Inc.’s Enbrel), Amgen’s Amjevita (a biosimilar version of AbbVie Inc.’s Humira) and Celltrion, and Pfizer’s Inflectra (a biosimilar version of Johnson & Johnson’s Remicade).
In late November, Pfizer is expected to launch Inflectra in the U.S.
Meanwhile, the widespread outbreak of the deadly Zika virus has brought companies focused on the disease, such as Inovio Pharmaceuticals, Inc. and Intrexon Corporation, to the forefront.
With this backdrop, let’s take a look at some companies in the health care space that have the potential to beat expectations in their upcoming releases. Although the Q3 earnings season is well underway, it’s not too late to cash in on the bountiful opportunities in the health care space.
These stocks are well positioned in today’s market environment, and could see considerable upside on the aforementioned trends.
Medical’s Performance So Far
With several pharma and major biotech companies having released their Q3 earnings results, Medical is one of the many sectors that is witnessing earnings and revenue growth this quarter. Our Q3 scorecard shows that 54.7% of the companies in the Medical sector have reported results so far, with earnings increasing 14.9% on 8.1% higher revenues. The blended beat, which represents the percentage of companies that have beaten both earnings and revenue estimates, stands at 48.3%.
Quite a few pharma and biotech companies are slated to report results in this week and next. Per our Earnings Trends report, Medical is one of the eight broader sectors that are anticipated to record positive earnings growth in Q3, with projections of 6% earnings growth on a 7.3% increase in revenues. Notably, this could be the first quarter to record positive earnings growth after five quarters of back-to-back declines.
So far, performance of the sector has been mixed. While it was a “beat and raise” quarter for some like Johnson & Johnson (JNJ), Bristol-Myers Squibb Co (BMY) and Celgene Corporation (CELG), Eli Lilly and Roche’s quarterly numbers fell short of expectations.
Grab the Prospective Q3 Winners
With the enormity of stocks in the healthcare space, selecting stocks that have the potential to beat estimates could appear daunting. But the proprietary Zacks methodology makes it fairly simple. One way to narrow down the list of choices this earnings season is by looking at stocks that sport the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Earnings ESP. More often than not, a positive earnings surprise delivered by a company leads to stock price appreciation.
The Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising with their upcoming earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%. Please check our Earnings ESP Filter that enables you to find stocks that are expected to come out with earnings surprises.
Going by this criterion, here are five healthcare stocks that we believe are poised to beat estimates this quarter.
Our first choice is Dublin, Ireland-based pharma company, Allergan plc Ordinary Shares (AGN), which has a Zacks Rank #3 and an Earnings ESP of +0.56%. The Zacks Consensus Estimate is pegged at $3.56. The company has consistently beaten earnings expectations. In fact, Allergan’s earnings have surpassed expectations in each of the last four quarters, with an average positive surprise of 3.44%.
Allergan is slated to report Q3 results on Nov 2, before the opening bell.
A well-known name in the attention deficit hyperactivity disorder market, Shire PLC (ADR) (SHPG) has made it to our list of the likely Q3 winners, thanks to its Zacks Rank #2 and +1.57% Earnings ESP. The Zacks Consensus Estimate is $3.18. Also based in Dublin, Ireland, Shire has beaten expectations in all of the past four quarters, bringing the average earnings surprise to 8.41%.
Shire is scheduled to report Q3 results on Nov 1, before the opening bell.
One of the leading global animal health companies, Zoetis Inc. (ZTS) has an impressive track record with the company consistently beating earnings expectations. Can Zoetis keep the earnings streak alive? Its Zacks Rank #3 and Earnings ESP of +2.17% sure indicate an earnings beat in Q3. The average positive earnings surprise over the last four trailing quarters is 15.92%. The Zacks Consensus Estimate currently stands at 46 cents.
Zoetis is scheduled to report Q3 results on Nov 2, before the market opens.
Oncology-focused biotech company, TESARO Inc (TSRO) is focused on the development of treatments targeting cancer. Based in Waltham, MA, TESARO has a disappointing track record with the company surpassing estimates only in one of the trailing four quarters. However, its prospects for Q3 look pretty good. The stock currently has an Earnings ESP of +2.08% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.
TESARO is slated to release Q3 results on Nov 3, after the market closes. The Zacks Consensus Estimate currently pegged at a loss of $1.92.
Our last pick is QIAGEN N.V. (QGEN), with a Zacks Rank #3 and an Earnings ESP of +3.70%. Its Zacks Consensus Estimate currently stands at 27 cents. Based in Netherlands, QIAGEN is one of the leading providers of sample-to-insight solutions that transform biological samples into valuable molecular insights. The company has recorded an average positive surprise of 0.20% over the trailing four quarters.
QIAGEN is set to release Q3 results on Nov 2, after the market closes.
The Bottom Line
Despite challenges like growing political pressure on drug prices in the U.S., biosimilar and generic competition, European pricing pressure, stressed balance sheets and other broad-based factors, newer therapies, licensing agreements, partnership/acquisition deals and restructuring initiatives should help support growth. We expect investors to keep an eye on these potential outperformers given their solid Zacks Rank and positive Zacks Earnings ESP.
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