6 Healthcare Stocks Investors Can't Miss in Q3 Earnings

Controversies surrounding drug prices are again making it to the headlines, this time spurred by the EpiPen price hike issue . Generic drug maker Mylan N.V. drew flak from lawmakers for over-pricing its epinephrine auto-injector, EpiPen (severe allergic reactions) around the end of Aug 2016.

Tweets, Deals & Biosimilars

The situation heated up after a tweet by Presidential candidate Hillary Clinton, which read "EpiPens can be the difference between life and death. There's no justification for these price hikes." Clinton even proposed a health care plan to keep drug prices under control, protecting consumers from unreasonable price hikes and making drug makers accountable.

The issue came to the forefront last year, with drug makers like Valeant Pharmaceuticals International, Inc. among others coming into the spotlight due to massive price hikes of their drugs. Last September, Clinton's "price gouging" tweet led to a major sell-off in the healthcare sector, particularly the biotech space, cutting the bull run of health care stocks short.

On the bright side, mergers and acquisitions, and licensing and collaboration deals continued to impress investors. At present, the most talked-about merger is that of German drug maker, Bayer AG and U.S. seed giant Monsanto Company. Last month, after months of negotiations, Bayer finally announced that it has inked a definitive agreement to acquire Monsanto in an all-cash deal worth $66 billion. Meanwhile, biotech company Horizon Pharma plc declared plans to take over California-based Raptor Pharmaceuticals Corp.

Further, in June, Shire plc acquired Baxalta to boost its rare disease and added key products to its hematology, oncology and immunology franchises, while Pfizer purchased oncology-focused company, Medivation, Inc., last month for approximately $14 billion.

Meanwhile, Allergan announced a string of small bolt-on acquisitions last month. The company will be acquiring clinical-stage biotech company, Vitae Pharmaceuticals, Inc., to boost its dermatology pipeline. It has also inked a couple of acquisition deals with Tobira Therapeutics, Inc. and Akarna Therapeutics Ltd., targeting the non-alcoholic steatohepatitis market.

While most partnerships between large-cap and development-stage companies were in the field of immuno-oncology, other therapeutic areas like autoimmune, cardiovascular, central nervous system disorders also saw action. Mergers, acquisitions and licensing deals are expected to continue in the future as companies look to boost their pipeline and gain a competitive edge.

In addition, news of product approvals, label expansion of existing drugs and regular pipeline updates have been coming in quite often, lifting investor spirits significantly.

While last year, the FDA approved the first biosimilar, Zarxio (a biosimilar version of Amgen Inc.'s (AMGN) blockbuster drug, Neupogen), September saw the regulatory approval of Amgen's Amjevita (adalimumab-atto), a biosimilar version of AbbVie Inc.'s Humira.

In this context, it is important to note that biosimilars are being touted as the next big thing in the healthcare sector.

What is the Trends Report Saying?

Firstly, Medical is one of the five sectors expected to record positive earnings growth in Q3.

Earnings in the Medical sector are expected to grow 2.8% on a 7.5% improvement in revenues, per our latest Earnings Trends report.

Pick the Likely Q3 Winners

Given the enormity of the healthcare space, selecting stocks that have the potential to beat estimates could appear daunting. 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 Earnings ESP . More often than not, a positive earnings surprise delivered by a company leads to stock price appreciation.

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising with their upcoming 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%.

Here are six healthcare stocks that we believe are poised to beat estimates, as per our methodology.

Our first pick is the bellwether of healthcare companies, Johnson & Johnson ( JNJ ), which has a solid presence in the pharmaceutical, medical devices and consumer care markets across the world. This New Brunswick, NJ-based company has a Zacks Rank #3 and an Earnings ESP of +4.88%. The Zacks Consensus Estimate is pegged at $1.64. The company has consistently beaten earnings expectations. In fact, Johnson & Johnson's earnings have surpassed expectations in each of the last four quarters, with an average positive surprise of 2.88%.

Johnson & Johnson is set to reveal Q3 results on Oct 18, before the opening bell.

Our next choice is biotech major, Amgen ( AMGN ). With a Zacks Rank #3, the stock carries an Earnings ESP of +2.14%. The Zacks Consensus Estimate stands at $2.80. This Thousand Oaks, CA-based company has a pretty impressive track record, with the company beating earnings estimates consistently. The average earnings surprise over the last four trailing quarters is 11.55%.

Amgen is expected to report Q3 results on Oct 26.

A well-known name in the multiple sclerosis market, Biogen Inc. ( BIIB ) made it to our list of the likely Q3 outperformers, thanks to its Zacks Rank #3 and 2.20% Earnings ESP. The Zacks Consensus Estimate is $5.00. This Cambridge, MA-based company has beaten expectations in all of the past four quarters, bringing the average earnings surprise to 11.39%.

Biogen is scheduled to report Q3 results on Oct 26, before the opening bell.

Large-cap pharma company, Bristol-Myers Squibb Company ( BMY ) exhibits an impressive track record, having consistently beaten earnings expectations. The company's earnings surpassed estimates in each of the four trailing quarters, with an average positive surprise of 15.56%. This New York-based company carries a Zacks Rank #3 and has an Earnings ESP of +4.69%. Thus, its prospects for Q3 appear pretty bright. The Zacks Consensus Estimate stands at 64 cents.

Bristol-Myers is scheduled to report Q3 results on Oct 27, before the opening bell.

Biotech company, United Therapeutics Corporation ( UTHR ) is another solid bet. Based in Silver Spring, MD, United Therapeutics recorded an average positive earnings surprise of 43.93% over the trailing four quarters. The stock currently has an Earnings ESP of +5.46% and it sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

United Therapeutics is expected to release Q3 results on Oct 25, with the Zacks Consensus Estimate currently pegged at $3.48.

The last company on our list is Exact Sciences Corporation ( EXAS ), with a Zacks Rank #2 and an Earnings ESP of +6.98%. The Zacks Consensus Estimate stands at a loss of 43 cents. Based in Madison, WI, Exact Sciences is a molecular diagnostics company focused on the early detection and prevention of the deadliest forms of cancer. It has registered an average positive surprise of 9.48% over the trailing four quarters.

Exact Sciences is set to release Q3 results on Oct 26, before market opens.

Bottom Line

Even as challenges in the form of competitive and pricing pressure persist in the healthcare sector, a number of healthcare companies are recording improvements in their financial numbers. A sneak peek into this space for some outperformers, that boast a solid Zacks Rank and a positive Earnings ESP, could be a great idea for investors to gain during the upcoming earnings season.

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JOHNSON & JOHNS (JNJ): Free Stock Analysis Report

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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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