After a tumultuous start to 2016 and a lackluster first quarter, things are finally looking up as we approach the end of the second-quarter earnings cycle. A large chunk of companies fared better than expectations, giving investors enough to cheer for.
The healthcare sector witnessed a particularly rough time in the first half of 2016, braving a challenging business environment fraught with headwinds like unfavorable currency movements and biosimilars. This lead to the issuance of bleak outlook for 2016 by most of the companies in the sector. Nevertheless, in the second quarter, results have managed to outpace expectations so far, which will let investors heave a sigh of relief at last.
Bigwigs like Johnson & Johnson (NYSE:JNJ), Novartis AG (NVS) and Abbott Laboratories (NYSE:ABT) were able to beat expectations comfortably. In the biotech space, major players like Biogen Inc. (NASDAQ:BIIB) topped both earnings and revenues expectations, while Gilead Sciences (NASDAQ:GILD) beat on earnings. Amgen (NASDAQ:AMGN) and AbbVie, Inc. (ABBV) also managed to surpass both earnings and sales expectations, and both have lifted their outlooks.
M&A and licensing deals should continue to take the center stage. In Jan 2016, Abbott Labs inked a definitive agreement to buy Alere Inc. (ALR) for $5.8 billion. Later in April, the company again entered into a definitive agreement to acquire St. Jude Medical (STJ). Meanwhile, Pfizer Inc. (NYSE:PFE) acquired Anacor in Jun 2016, following its completion of the Sep 2015 Hospira takeover. In the biotech space, Shire plc (SHPG) acquired Baxalta to further strengthen its rare disease portfolio. Swiss major Novartis is reportedly eyeing to buy AstraZeneca (AZN), as per Reuters.
Going ahead, new product approvals, along with the label expansion of existing drugs and regular pipeline updates related to key drugs, should keep investor attention glued to the sector.
Although the Q2 earnings cycle has almost ended, it is not too late to enter the promising healthcare sector given the strong fundamentals, healthy pipelines and the drive to find innovative treatments for rare diseases. Here, we will help you to identify a few companies in the healthcare sector that have the potential to beat earnings in their upcoming releases. These stocks are well positioned in today’s market environment, and could see considerable upside due to the aforementioned trends. An earnings beat should help these stocks gain investor confidence and show a favorable price movement.
How to Pick?
Given a large number of industry participants, pinpointing stocks that have the potential to beat estimates could appear to be quite daunting. But our proprietary methodology makes it fairly simple. One way to narrow down the list of choices this earnings season is by looking at stocks that have the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Earnings ESP.
The Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in their next 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%.
Below we list a few stocks that are expected to conclude the earnings season with a positive surprise:
Asterias Biotherapeutics, Inc. (AST) currently carries a Zacks Rank #3 and an Earnings ESP of +42.11%. This biotechnology company is presently developing proprietary cell therapy programs that are based on its immunotherapy and pluripotent stem cell platform technologies. Immunotherapy is a key area of focus in the medical sector and Asterias’ pipeline looks interesting at this juncture. The company’s pipeline candidates include AST-OPC1 (oligodendrocyte progenitor cells, currently in a phase I/IIa dose escalation clinical study for spinal cord injury). Another candidate, AST-VAC1 (antigen-presenting autologous dendritic cells), showed positive results for a phase II study in acute myelogenous leukemia (AML). The third candidate, AST-VAC2 (antigen-presenting allogeneic dendritic cells), represents a second-generation, allogeneic immunotherapy (phase I/II clinical trial of AST-VAC2 in non-small cell lung cancer slated to start in 2017). We expect investor focus on pipeline updates when the company releases second-quarter results on Aug 15.
Bio Blast Pharma Ltd. (ORPN) is a development-stage biopharmaceutical company focused on the identification, licensing, acquisition, development and commercialization of drugs for rare and ultra-rare genetic diseases. Such diseases generally have few or no treatments available, thereby underscoring the need for new ones. The company has developed and in-licensed potential treatments for a range of diseases. At present, the company has several drug candidates in clinical or preclinical development targeting neuromuscular/central nervous system (CNS) and mitochondrial diseases. Bio Blast is expected to release second-quarter results on Aug 19. With an impressive track record, a Zacks rank #3 and an Earnings ESP of +22.22%, we are hopeful of an earnings beat this quarter.
Evoke Pharma, Inc. (EVOK) currently carries a Zacks Rank #3 and has an Earnings ESP of +4.65%. This specialty pharmaceutical company focuses on treatments for gastrointestinal (GI) diseases. The company is currently developing EVK-001, a metoclopramide nasal spray, for the relief of symptoms associated with acute and recurrent gastroparesis in women with diabetes mellitus. The spray formulation is designed to provide systemic delivery of metoclopramide through nasal administration. The company’s track record is mixed, having beaten estimates in three of the four quarters and missing the same once. Nevertheless, a favorable Zacks Rank and a positive ESP makes us positive about an earnings beat this quarter. Evoke is scheduled to release second-quarter results on Aug 15.
Bottom Line
Although obstacles remain in the form of biosimilars and currency headwinds, investors would do well to keep an eye on these potential outperformers given their solid Zacks Rank and positive Zacks Earnings ESP.
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ASTERIAS BIOTHR (AST): Free Stock Analysis Report
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