Fundamentals Remain Strong In The Pharma Sector

Although pharma and biotech stocks are facing challenges in the form of increasing focus on the high prices of drugs, a changing competitive scenario and mixed results, the sector’s fundamentals remain strong -- mergers and acquisitions (M&As), product approvals and positive data flow should act as catalysts.

M&As to Pick Pace?

The overall pharma industry has seen a lot of consolidation over the last few years, with quite a few deals being announced/completed this year as well. With the major price correction resulting in reasonable valuations, we could see several M&A agreements being announced in the coming quarters, though companies are wary of bidding wars leading to over-priced deals.

The Pfizer-Medivation deal, valued at approximately $14 billion, has raised hopes that M&As will pick up pace while licensing deals will continue. Big players like Sanofi (PA:SASY) and J&J have expressed an interest in pursuing M&A deals. Allergan (NYSE:AGN_pa) (AGN) has also been very active on the acquisition and deal-making front. While some of these companies are looking to replace sales of blockbuster products that are facing loss of patent exclusivity, others are looking to build their pipelines both through acquisitions as well as licensing agreements.

Companies with innovative technologies and pipelines are highly sought after. Niche disease areas like nonalcoholic steatohepatitis (NASH), immuno-oncology, multiple sclerosis and hepatitis C virus (HCV) are in demand. Treatments for orphan diseases are also much sought after with quite a few deals being signed in these areas.

Innovative Pipelines

Pharma and biotech companies continue to work on bringing innovative new treatments to market and there could be significant catalysts in the coming quarters in the form of important new product approvals as well as major data read-outs especially in important therapeutic areas like immuno-oncology, Alzheimer’s, hepatitis C virus (HCV), central nervous system disorders, and immunology/inflammation.

Among these, immuno-oncology has been attracting a lot of interest as these therapies have the potential to change the treatment paradigm for cancer -- they basically use the natural capability of the patient's own immune system to fight the cancer. Major players in this field include Bristol-Myers (BMY), AstraZeneca, Merck (NYSE:MRK) and Roche.

Deals targeting immuno-oncology are being inked by companies like Pfizer (NYSE:PFE), Merck KGaA, Bristol-Myers, AstraZeneca and Incyte. Companies like Kite and Juno are also advancing in this area. Interest in PARP inhibitors has also increased considerably as they could well be the next major class of therapeutics in oncology.

New Product Sales Should Ramp Up

Sales of products that gained approval last year as well as line extensions should ramp up and boost growth. Some recently approved products with blockbuster potential include Amgen’s (AMGN) PCSK9 inhibitor, Repatha, Regeneron/Sanofi’s PCSK9 inhibitor Praluent, Novartis’ psoriasis treatment, Cosentyx, Pfizer’s cancer treatment, Ibrance, and Gilead’s Genvoya (HIV). Cancer treatments like Kyprolis and Imbruvica should also bring in more sales thanks to label expansions.

Meanwhile, so far in 2016, the FDA has approved 19 new drugs including Zinplava (c. difficile infection), Lartruvo (soft tissue carcinoma), Exondys 51 (Duchenne muscular dystrophy), Epclusa (HCV), Ocaliva (rare, chronic liver disease), Zinbryta (multiple sclerosis), Tecentriq (urothelial cancer), Venclexta (chronic lymphocytic leukemia in patients with a specific chromosomal abnormality), Taltz (moderate-to-severe plaque psoriasis), Cinqair (severe asthma) and Zepatier (HCV) among others. The FDA also expanded the label of cancer drugs like Kyprolis, Imbruvica and Xalkori.

Earnings Performance

Despite the different issues being faced by the sector, several pharma and biotech companies have topped earnings as well as revenue expectations in the third quarter. Companies like J&J, Merck, Biogen (NASDAQ:BIIB) (BIIB), Celgene and Bristol-Myers have in fact topped earnings estimates in all three quarters of 2016.

Stock Picks

Although it may take a while for the dust around the drug pricing issue to settle down, pipeline success in innovative and important therapeutic areas, cost-cutting, share buybacks, new products, increased pipeline visibility and appropriate utilization of cash should help restore investor confidence in this sector.

Here are a few stocks that have been witnessing positive estimate revisions and carry a favorable Zacks Rank -- #1 (Strong Buy) or #2 (Buy).

Merck & Co., Inc. (MRK): This Zacks Rank #2 stock has a good earnings track record with the stock beating estimates in each of the last four quarters with an average surprise of 4.3%. The stock is up almost 13% year-to-date (YTD) and is witnessing positive estimate revisions for 2016 (up 0.5%) as well as 2017 (up 2.4%) over the last 30 days.

Celgene Corporation (NASDAQ:CELG) (CELG): Following the release of strong third quarter results, Celgene is witnessing positive estimate revisions for both 2016 (up 3.3%) and 2017 (up 0.5%) over the last 7 days. The Zacks Rank #2 stock also raised its outlook for 2016. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

ARIAD Pharmaceuticals Inc. (ARIA): Oncology-focused ARIAD is also witnessing positive estimate revisions with 2016 estimates revised upwards by 25% over the last 7 days. Moreover, the Zacks Rank #2 stock has seen its share price shoot up 49.2% so far in 2016. The company is often in the news as an attractive takeover target.

All said and done, the pharma sector’s fundamentals remain strong -- robust pipelines, innovative treatments, impressive results, growing demand for drugs especially for rare-to-treat diseases, an aging population and increased health care spending should support growth. To know more about this sector, check out our latest Pharma Industry Outlook.

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