After the patent cliff, many health care companies now have fewer blockbuster products. Flimsy pipelines are also a matter of concern. Although new products are being introduced, it will be several years before they are able to generate revenues at the same levels as the blockbuster drugs that have gone off-patent.
As a result, health care companies are now resorting to share buybacks, restructuring, streamlining of operations by divesting non core/redundant assets, cost cutting through job cuts and lowering operating expenses, which include cutting research and development (R&D) expenses, to boost the bottom line.
Another trend that has picked up lately is tax-saving reverse mergers. Earlier this month, AbbVie Inc. ( ABBV ) entered into an agreement to acquire Shire ( SHPG ). The deal is valued at approximately $54.5 billion. The deal is expected to reduce AbbVie's effective tax rate to approximately 13% by 2016 from the current effective tax rate in the low twenties. Earlier this year, Pfizer Inc. ( PFE ) was actively pursuing AstraZeneca ( AZN ) primarily motivated by potential tax benefits. However, the deal did not materialize.
Tax saving is not the sole motivation behind reinvigorated M&A activities in the health care sector currently. Cash rich companies are on the lookout for other players that have a portfolio of potential multi-million dollar products or lucrative pipeline candidates. Actavis ( ACT ) acquired Forest Laboratories for a cash and equity combination of $28 billion to boost its branded product portfolio. Valeant Pharmaceuticals International, Inc. ( VRX ) is also looking to acquire Allergan ( AGN ) to strengthen its portfolio. Allergan has rejected Valeant's latest acquisition offer.
Several health care companies are also entering into licensing deals to augment their pipeline. Immuno-oncology seems to be one of the favorite therapeutic areas in this regard. In the last couple of months, we saw a number of deals whereby large cap health care companies have shown interest in developing immuno-oncology therapies. Eli Lilly and Company ( LLY ) entered into a co-discovery and co-development agreement with privately held Immunocore Limited for the research and development of new T cell-based cancer treatments. Before that, Pfizer Inc. ( PFE ) entered into an agreement with the French biopharmaceutical company, Cellectis, to develop chimeric antigen receptor T-cell immunotherapies directed at select oncology related targets.
Thus, it may be a good idea to look at some of these companies in the health care 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 riding on 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 a daunting task. 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 Zacks Earnings ESP (Expected Surprise Prediction).
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 are three health care stocks we believe are best positioned to stand out this earnings season.
ARIAD Pharmaceuticals, Inc. ( ARIA ), based in Cambridge, MA and Lausanne, Switzerland, is a Zacks Rank #3 (Hold) stock with an Earnings ESP of +3.70%. The Zacks Consensus Estimate for the second quarter is a loss of 27 cents. The company has a solid track record of delivering positive surprises with an average beat of 13.59% in the last four quarters. The company is expected to beat expectations in the second quarter as well.
ARIAD is a global oncology company focused on the development and commercialization of new medicines to advance the treatment of chronic and acute leukemia, lung cancer and other difficult-to-treat cancer forms. The company's sole marketed drug, Iclusig, approved for chronic myeloid leukemia and Philadelphia chromosome-positive acute lymphoblastic leukemia should continue to drive revenues.
- ARIAD is scheduled to announce its second quarter 2014 financial results before the opening bell on Aug 6.
ImmunoGen, Inc. ( IMGN ) is a Zacks Rank #3 stock with an Earnings ESP of +13.89%. The Zacks Consensus Estimate for fiscal fourth quarter 2014 (ended Jun 30) is a loss of 36 cents. The company has registered positive earnings surprises in three of the last four quarters with an average beat of 58.43%.
The Waltham, MA-based biopharmaceutical company is engaged in the development of antibody-drug conjugates for the treatment of cancer. ImmunoGen's revenues comprise research and development support fees, license and milestone fees, royalty revenues and clinical material revenues. The company has partnerships with several big companies including Roche (RHHBY) and Sanofi (SNY). ImmunoGen receives royalties on sales of oncology drug, Kadcyla, under an agreement with Roche. With Kadcyla continuing to perform well, royalty revenues should improve.
- ImmunoGen will be reporting fiscal fourth quarter 2014 results before market opens on Aug 1.
Durata Therapeutics, Inc. ( DRTX ), based in Chicago, IL, is focused on the development and commercialization of new therapeutics for patients with infectious diseases and acute illnesses. The stock carries a Zacks Rank #2, with an Earnings ESP of +6.85%. The Zacks Consensus Estimate for the to-be-reported quarter is a 73 cent loss.
Although the surprise history for the stock has been unimpressive, it is poised for a beat this second quarter. The company received a major boost during the quarter when the FDA approved its antibiotic Dalvance for treating adults suffering from acute bacterial skin and skin structure infections caused by susceptible gram-positive bacteria, including methicillin resistant staphylococcus aureus.
- Durata is set to report second quarter 2014 earnings on Aug 7 before market opens.
While challenges in the form of increasing competition and pricing pressure remain in the health care sector, a number of health care companies are seeing improvements in their financial results. The companies are nevertheless looking for better strategies to emerge as winners. A sneak peek at the space for some outperformers, backed by a solid Zacks Rank and a positive Zacks Earnings ESP, could be a great idea for investors to gain from this earnings season.
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