2 Large-Cap Drug Stocks Missing Out on Industry Rally in '17

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After the drug pricing issue crippled its performance last year, the drug/biotech industry, except for a small correction recently, has witnessed a turnaround this year. Stocks with large market cap have done particularly well. After declining 5.2% last year, the Large Cap Pharma industry has risen 15.3% this year so far with a number of things going in its favor.

Strong quarterly results, new product sales ramp up with rising demand, successful innovation and product line expansion, strong clinical study results, more frequent FDA approvals and continued strong performance of legacy products played a pivotal role in bringing the large-cap drug sector back on track this year.

Most drug companies with a larger market cap have seen their share price rising this year. AstraZeneca AZN , Novo Nordisk NVO , Novartis NVS , and Johnson & Johnson JNJ have even outperformed the industry. However, a couple of large-cap pharma companies have witnessed a downside this year. We discuss them below.

Merck & Co., Inc. MRK

While Merck was one of the very few companies whose shares were up last year notwithstanding the industry's decline, it's the other way round this year. Shares of Merck have declined 7.3% this year so far.

Merck has suffered some notable pipeline setbacks this year. In October, Merck decided not to seek approval for its CETP inhibitor anacetrapib for cholesterol management as its clinical profile was not strong enough to support regulatory filings.

Last month, the company also announced a delay in the readout from an important lung cancer study to 2019. This was due to the inclusion of overall survival as a co-primary endpoint in the KEYNOTE-189 phase III study of Keytruda in first-line lung cancer. This raised investor concern, as the delay in the readout can give competitors a chance to gain strength in the lung cancer market.

In October, Merck also withdrew a regulatory application in Europe, which was looking to get Keytruda approved as first-line combination therapy for lung cancer.

In September, Merck discontinued the development of two of its HCV combination programs - MK-3682B and MK-3682C - saying that the HCV market is becoming extremely crowded. Also, three combination studies of Keytruda for multiple myeloma were placed on clinical hold following reports of death in Keytruda groups in July. Keytruda is seen as a key long-term growth driver at Merck and such setbacks do not bode well for the company.

It remains to be seen if the strong performance of its new drugs, particularly Keytruda, its strong vaccines and animal health business and cost saving efforts can help Merck pick up from here.

GlaxoSmithKline plc GSK

Shares of Glaxo are down 7.7% this year so far.

The stock was on a rising trajectory till the announcement of third-quarter resultson Oct 25. On the third-quarter conference call, Glaxo expressed its interest to purchase Pfizer's PFE consumer healthcare business, which the latter plans to put up for sale. However, Glaxo's interest in buying Pfizer's unit raised investor concerns about the acquirer possibly sacrificing a portion of its dividend payment due to the potential buyout. Shares declined sharply thereafter.

Meanwhile, persistent challenges like stiff competition, genericization, pricing pressure and slowing growth in emerging markets have been hurting sales. Pricing pressure and competitive dynamics are hurting sales in Glaxo's respiratory franchise, particularly the older products. Meanwhile, its top-selling product, Advair is also expected to face generic competition in the United States next year, which will further hurt sales. The slowdown in sales of the Consumer Healthcare segment this year is also a concern.

We would like to see if Glaxo's strong pipeline, consistent outperformance of new HIV drugs and vaccines, three new products - Trelegy Ellipta, Shingrix and Juluca - that have boosted its portfolio lately, and cost cuts can bring it back on track next year.

Both Merck and Glaxo have a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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