The Zacks Medical-Drugs industry comprises small drug companies, including some foreign ones, which make medicines for both human and veterinary use. We have a separate industry outlook discussion for some of the biggest drugmakers of the world. (Read more:Large-Cap Pharmaceuticals Industry Prospects Bright for 2020)
Most of the small drugmakers have a limited portfolio of marketed drugs or in some cases no commercial-stage drugs at all. Some of these clinical stage drugmakers are dependent on just one marketed drug or pipeline candidate. For most of these companies, upfront or milestone payments from collaboration partners — in most cases their larger counterparts — are the main source of revenues. These companies therefore need ample free cash flow to fund their research and development activity.
Here are the industry’s three major themes:
- The success or failure of key pipeline candidates in clinical studies can significantly drive stock price of the industry players.
- For these smaller companies, succeeding in a shifting global market and evolving healthcare landscape requires them to adopt innovative business models, invest in new technologies, increase investments in personalized medicines and seek external partners and collaborators for complementary strengths. A partnership deal with a popular drugmaker is a good sign about the potential of small pharma companies, especially when an equity investment is included in the deal.
- Over the past few years, scientific and technological advancements have made it possible to develop personalized therapies. Other than that, adoption and information exchange through meaningful use of health IT, development of therapies that improve overall patient outcomes and investment in developing and emerging markets are some of the new priorities for drug companies, both large and small.
Successful innovation resulting in new drug approvals, important advances in clinical studies, strategic collaborations with strong partners and frequent M&A activity have kept these companies afloat in a competitive market. However, failure of key pipeline candidates in pivotal studies and regulatory and pipeline delays pose concerns.
Zacks Industry Rank Indicates Bright Prospects
The group’s Zacks Industry Rank is basically the average of the Zacks Rank of all the member stocks.
The Zacks Medical-Drugs industry currently carries a Zacks Industry Rank #112, which places it in the top 44% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Before we present a few small drug stocks that are well positioned to outperform the market based on a strong earnings outlook, let’s take a look at the industry’s stock market performance and current valuation.
Industry Underperforms S&P 500 & Sector
The Zacks Medical-Drugs industry is a huge 176-stock group within the broader Medical sector. The industry has underperformed the S&P 500 as well as the Zacks Medical sector in the past year.
Stocks in this industry have collectively declined 0.3% in the past year, while the Zacks S&P 500 composite and the Zacks Medical sector have risen 23.8 % and 4.5%, respectively.
One Year Price Performance
Industry’s Current Valuation
On the basis of trailing twelve months price-to-sales ratio (P/S F12M), which is a commonly used multiple for valuing these small drugmakers that hardly make profits, the industry is currently trading at 3.32 compared with the S&P 500’s 3.6 and the Zacks Medical sector's 3.19.
Over the last five years, the industry has traded as high as 4.16X, as low as 1.97X, and at the median of 2.60X, as the chart below shows.
Price-to-Sales Trailing Twelve Months (TTM) Ratio
Bottom Line
The smaller companies have their share of risk in the form of unstable cash flows. Also, negative clinical outcome or regulatory obstacles can be huge setbacks for these smaller companies and significantly hurt their share price. However, sometimes investing in smaller innovative companies makes more sense than investing in their larger counterparts, which are plagued by generic competition for their key drugs, pricing issues and rising competition.
In the Medical-Drugs universe, four stocks currently sport a Zacks Rank #1 (Strong Buy), while several others have a Zacks Rank #2 (Buy). Here we discuss four stocks, which have a Zacks Rank #1 or 2 and have witnessed positive earnings estimate revisions in the past 60 days and stock price increases in the past three months.
You can see the complete list of today’s Zacks #1 Rank stocks here.
KalVista Pharmaceuticals (KALV): The Zacks Consensus Estimate for this Cambridge, MA based clinical stage biotech’s 2020 loss per share has narrowed from $2.85 per share to $2.74 per share over the past 60 days. KalVista’s stock has jumped 68.2% in the past three months.
Price and Consensus: KALV
Amneal Pharmaceuticals (AMRX): The Zacks Consensus Estimate for this Bridgewater, NJ drug company’s 2020 EPS has risen 8.5% over the past 60 days. Amneal’s stock has jumped 69.4% in the past three months.
Price and Consensus: AMRX
Collegium Pharmaceutical (COLL): The stock of this Stoughton, MA based specialty pharmaceutical company that makes pan drugs has risen 105% in the past three months. The consensus estimate for 2020 has risen almost 79% over the past 60 days.
Price and Consensus: COLL
Matinas Biopharma Holdings (MTNB): The stock of this Bedminster, NJ based clinical stage biotech has risen 109.3% in the past three months. The consensus estimate for 2020 has narrowed from loss of 17 cents to 15 cents over the past 60 days.
Price and Consensus: MTNB
Matinas Biopharma Holdings, Inc. (MTNB): Free Stock Analysis Report
KalVista Pharmaceuticals, Inc. (KALV): Free Stock Analysis Report
Collegium Pharmaceutical, Inc. (COLL): Free Stock Analysis Report
AMNEAL PHARMACEUTICALS, INC. (AMRX): Free Stock Analysis Report
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