The performance of the drug/biotech space has been mixed this year so far. The Zacks Large Cap Pharmaceuticals industry (comprising some of the biggest drugmakers in the world) has gained 7.7% compared with the S&P 500's increase of 0.3%.
However, the riskier Zacks Medical-Biomedical and Genetics industry, which includes large as well as small biotech companies, has underperformed the S&P 500. The biotech sector has declined 18.1% against the S&P 500's increase of 0.3%, probably due to some pipeline setbacks faced by the industry.
Large -Cap Pharma and Biomed/Genetics Versus S&P 500
The Large-Cap Pharmaceuticals industry features among the top 30% of the 255 Zacks-ranked industries
We believe that strong quarterly results, consistent increases in full-year sales and earnings guidance, new product sales ramp up with rising demand, successful innovation and product line extensions, strong clinical study results, and frequent FDA approvals have helped these big drug giants to consistently do well this year despite broader macro issues as well as the industry's own challenges. Moreover, it is likely to perform well even if the global economy slows down next year. This is because it is a defensive growth sector, which is almost insulated from broader macroeconomic factors.
Importantly, mergers and acquisition activity is gaining momentum with the tax reform in place. Key acquisitions so far this year include Sanofi's SNY multi-billion dollar buyouts of Ablynx and Bioverativ, Novartis' NVS acquisition of AveXis and Roche's purchase of Foundation Medicine. Also, Glaxo's GSK buyout of Novartis' 36.5% stake in their consumer health care joint venture was given a heads up by the investor community.
However, the sector faces its share of headwinds like government scrutiny of high drug prices, pricing and competitive pressure, generic competition for blockbuster treatments, slowdown in sales of some of the most high-profile older drugs and major pipeline setbacks.
Drug pricing controversy was back in news this month after a Wall Street report stated that Pfizer PFE plans to increase the list prices of its 41 prescription drugs next year. The drug giant had put off such increases earlier this year as it faced criticism from President Donald Trump.
Nonetheless, we believe pipeline success, cost cutting, share buybacks, product launches, increased M&A and collaboration activity and appropriate utilization of cash should keep the sector afloat through the rest of this year and next.
In this scenario, investing in stocks with a large market cap is a prudent move given the fact that they control a large portion of an industry. Given this backdrop, it makes sense to invest in some of the bigshot drugmakers.
Here we have highlighted four stocks that may prove to be good buys. All these stocks carry a Zacks Rank #2 (Buy) and have seen their share price and earnings estimates rise this year. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .
A chart showing the share price movement of all the four stocks this year so far is given below.
Eli Lilly & Company LLY
Lilly's earnings estimates have increased 2% for 2018 and 1% for 2019 over the past 60 days. The company's shares have increased 36.8% this year so far.
Lilly's new products like Trulicity, Taltz, Basaglar, Cyramza, Jardiance, Lartruvo and Verzenioare driving sales growth. The company is also on a strong footing in terms of its pipeline with several positive late-stage data readouts this year along with various regulatory approvals. A key regulatory success for Lilly was the FDA approval of Emgality/galcanezumab, a calcitonin gene-related peptide (CGRP) antibody for migraine prevention, which could emerge as a significant contributor to long-term growth.
Several key regulatory and pipeline events are expected in 2019. Any positive outcome will push up share price further.
This year, Lilly also added promising new assets through business development deals including pancreatic cancer candidate, pegilodecakin, which was added with the acquisition of ARMO Biosciences. Meanwhile, the separation of its animal health unit, Elanco, via an IPO, is a prudent decision in our viewas the unit was underperforming.
Merck & Co., Inc. MRK
Shares of Merck have risen 37.3% this year so far. Merck's earnings estimates for 2018 have gone up 1.6% while that for 2019 have moved up by 1.7% in the past 60 days.
Strong performance and positive regulatory updates related to its PD-1 inhibitor, Keytruda aided the company. In a very short span of time Keytruda has become Merck's largest product. It is already approved for use in 12 indications across eight different tumor types in the United States. In fact, the Keytruda development program is also progressing rapidly. Several regulatory decisions for new indications in the United States as well as in Europe are due in 2019, which, if approved, can further boost sales.
Key recent approvals for Merck include Steglatro and its fixed-dose combinations for type II diabetes, two new HIV drugs - Pifeltro and Delstrigo - containing doravirine and Prevymis (letermovir) for cytomegalovirus (CVM) infection. Merck also gained several label expansion approvals for Keytruda and another cancer drug Lynparza, which it markets in partnership with AstraZeneca (AZN).
All these new drugs and line extension approvals can boost the company's pharmaceuticals sales in the future quarters.
Merck's animal health and vaccine products are also performing strongly and remain core growth drivers for Merck.
Merck also announced positive data from several late-stage studies, mainly evaluating Keytruda for further line extensions. Merck also signed a co-development deal with Japan's Eisai Co., Ltd for the latter's tyrosine kinase inhibitor, Lenvima.It also agreed to buy Viralytics Limited, an Australian pharmaceutical company that develops oncolytic immunotherapies for a range of cancers,which should strengthen its oncology portfolio.
Glaxo's shares have risen 16.2% year to date. Glaxo's earnings estimates for 2018 have gone up 1.4% while that for 2019 have moved up by 1.3% in the past 60 days.
We think Glaxo possesses one of the stronger late-stage pipelines in large-cap pharma and the U.K. based giant has made significant progress with its late-stage pipeline this year. Data from several of the late-state pipeline programs are expected in 2019. The performance of Glaxo's new products has been encouraging. The three newest products - Trelegy Ellipta, Shingrix and Juluca - are doing well, particularly Shingrix. These three products coupled with buyout of Novartis' stake in the Consumer Healthcare JV have strengthened Glaxo's competitive position.
Johnson & Johnson JNJ
J&J's shares have risen 4.9% this year. Its earnings estimates for 2018 have gone up 0.2% while that for 2019 have moved up by 0.6% in the past 60 days.
J&J's Pharma segment is performing better than the market in 2018 despite the impact of biosimilars on sales of its blockbuster rheumatoid arthritis medicine, Remicade. Also, the Medical Devices and Consumer units are seeing improving organic growth trends.
J&J has also raised its full-year organic sales growth outlook thrice this year. Though quite a few key products in J&J's portfolio like Remicade and Concerta are facing generic competition, we believe that new products in all segments, successful label expansion of cancer drugs like Imbruvica and Darzalex and contribution from recent acquisitions will continue to drive top-line growth. J&J enjoys a robust multi-year pipeline of new drugs and line extensions. Share buybacks and restructuring initiatives should provide bottom-line support.
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free reportSanofi (SNY): Free Stock Analysis ReportNovartis AG (NVS): Free Stock Analysis ReportEli Lilly and Company (LLY): Free Stock Analysis ReportMerck & Co., Inc. (MRK): Free Stock Analysis ReportJohnson & Johnson (JNJ): Free Stock Analysis ReportGlaxoSmithKline plc (GSK): Free Stock Analysis ReportPfizer Inc. (PFE): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research