The 2014 Q2 earnings season has been impressive for the Medical sector with 16.1% year-over-year earnings growth on 12.5% increase in revenues. Also, among the 94% sector participants reported so far, 78.7% delivered positive earnings surprises. Favorable industry trends in pharma and biotech primarily contributed to this robust growth.
Impressive Growth Trends in Pharma and Biotech
Pharmaceutical companies have been affected by genericization over the past few years. However, the worst of patent cliff is over and several companies are now on the recovery path.
Johnson & Johnson (NYSE:JNJ) was the first major company from the drug manufacturing industry to post impressive second-quarter earnings. Other major drug manufacturers such as Pfizer Inc (NYSE:PFE) and Merck & Company Inc (NYSE:MRK) also reported upbeat results.
Earnings growth in biotechnology firms such as Gilead Sciences Inc (NASDAQ:GILD) and Amgen Inc (NASDAQ:AMGN) became a yardstick for other stocks in the same segment.
The NYSE ARCA Pharmaceutical Index is up almost 20.1% in the last year. So far in 2014, the index increased10%. As of Aug 11, 2014, the Standard & Poor’s biotechnology index soared 13.6% since January, compared to the S&P 500’s gain of 5.1%.
Pharma and bio-tech space witnessed a slew of IPOs in the last few quarters. Fifty three pharmaceutical and biotech firms launched IPOs this year. The segment also witnessed a flurry of new deals in therecent months. All these boosted investors’ sentiment and thus pushed the stock prices up.
New Drugs & Increased Spending Boost Growth
Development of new drugs and an increase in healthcare spending also fueled growth of pharma and bio-tech stocks.
Throughout the first half of 2014, several important products gained approval by the Food and Drug Administration (FDA). Shares of Achillion Pharmaceuticals Inc (NASDAQ:ACHN) had skyrocketed (gained 83.3%) after the FDA lifted the clinical hold on Achillion’s lead drug sovaprevir. Merck was also immensely benefitted after the U.S. health regulator approved the drug, vorapaxar.
A number of new drugs are also in the pipeline. Many companies have already announced FDA acceptance for filing of New Drug Application (NDA).
Amid all these, the Ebola outbreak is also making headlines. This has brought biotech companies such as Tekmira Pharmaceuticals Corporation (TO:TKM) into the spotlight for their experimental Ebola disease treatments.
Meanwhile, Americans are currently in a better position to meet medical costs thanks to the rebound in the U.S. economy. This recovery has propelled healthcare spending. According to PricewaterhouseCoopers’s (PwC) Health Research Institute, healthcare spending is expected to rise 6.8% in 2015, up from 6.5% increase forecasted for this year.
The Affordable Care Act (ACA), or “Obamacare,” also pushed healthcare spending upward. An aging population also significantly contributed to healthcare spending. Most of the baby boomers are expected to turn 65 and older between 2012 and 2030. Further, U.S. Census Bureau stated the nation’s 65-and-older population is anticipated to reach 83.7 million in 2050.
Banking on these encouraging factors along with ever increasing demand in emerging markets, drug manufacturing and biotech companies are poised to grow in the coming quarters.
3 Medical Stocks to Buy Now
Gilead Sciences Inc. is a biopharmaceutical company that develops and commercializes medicines for treatment of life threatening diseases. Gilead Sciences posted second-quarter earnings per share of $2.32, surpassing the Zacks Consensus Estimate of $1.61. Moreover, the Zacks Consensus Estimate for the company’s current year earnings increased 18.4% to $7.26 per share in the 30 days ago.
Last Friday, Gilead won a dispute with Roche related to rights of its hepatitis C drug, Sovaldi. Shares of the Gilead rose sharply and touched a new high of $99.49. It's good news for Gilead since IMS Health revealed that prescriptions for Sovaldi amount to more than all other Hepatitis C treatments combined.
This Zacks Rank #1 (Strong Buy) stock has an attractive PEG ratio of 0.46. In the last three months, the stock gained 23.4%.
Allergan Inc (NYSE:AGN) operates as a multi-specialty health care company. Allergan reported second quarter 2014 earnings of $1.51 per share, above the Zacks Consensus Estimate of $1.44. Earnings also climbed 23.8% from the year-ago quarter.
The company expects third quarter earnings in the range of $1.44–$1.47 per share. The Zacks Consensus Estimate currently stands at $1.44. The company also expects 2014 earnings to increase $5.74–$5.80 per share, well above the Zacks Consensus Estimate of $5.70 per share.
Expected earnings growth rate for this Zacks Rank #1 (Strong Buy) stock is 21.4% for this year, much above the industry growth rate of 0.5%.
Supernus Pharmaceuticals Inc (NASDAQ:SUPN) is a specialty pharmaceutical company which focuses on the development and commercialization of products for the treatment of central nervous system diseases in the U.S.
Supernus posted second-quarter 2014 earnings per share of 6 cents, which compared favorably with the Zacks Consensus Estimate of a loss of 18 cents and the year-ago loss of 57 cents. Revenues were $29.7 million, up 10.5% from the year-ago quarter. Revenues were well above the Zacks Consensus Estimate of $19 million.
Supernus has raised its annual revenue guidance to $105 million (previous guidance: $75 million − $85 million).
Expected earnings growth rate for this Zacks Rank #2 (Buy) stock is 100.7% for 2014, significantly higher than the industry growth rate of 24.3%.
Bottom Line
These stocks with strong fundamentals and growth prospects are poised to gain in the near future. While it is expected that most of the stocks in the pharma and bio-tech space will gain, those with a favorable Zacks Rank may ensure outperformance.