Forget Novavax, Buy These 4 Biotech Stocks Instead

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Shares of Novavax, Inc.NVAX plunged around 82% in pre-market trading on Friday after the biopharmaceutical company announced a day before that its key vaccine candidate unexpectedly failed to meet the primary endpoint in a phase III trial.

What Went Wrong at Novavax

Top line data presented from the Resolve trial evaluating its RSV F vaccine for preventing lower respiratory tract disease in 11,856 older adults (60 years of age and older) failed to meet the pre-specified primary or the secondary efficacy objectives. The primary objective of the randomized, placebo-controlled Resolve trial was to demonstrate efficacy in preventing moderate-severe RSV-associated lower respiratory tract disease while the secondary objective was to show efficacy in reducing the incidence of all symptomatic respiratory disease due to RSV (RSV ARD). Though the vaccine was well tolerated in the trial, it failed to demonstrate vaccine efficacy.

Chief Gregory Glenn said that an initial analysis did not show any issues with the "trial execution, data collection, data integrity, or drug product quality" that can be blamed for the unfavorable outcome.

Also top line results presented from another phase II rollover trial of the vaccine candidate showed absence of efficacy of a single immunization. However, the data did suggest improved vaccine efficacy from the second year of dosing.

Novavax is a clinical stage company and has no marketed products at present. There are currently no approved vaccines to fight RSV. Novavax's vaccine, if approved, can bring in huge revenues for the company. Therefore, the failure of this key pipeline candidate in late stage trials is a huge setback for the stock. Novavax has a Zacks Rank #4 (Sell).



The Broader Sector Picture

It has been a pretty rough year for the healthcare sector. A changing competitive scenario and media and political focus on the high prices of drugs have made things difficult for the pharma/biotech sector since the past one year.

Democratic presidential candidate, Hillary Clinton has pledged to find ways to institute reforms to curb rising drug prices and thereby lower prescription drug costs for all Americans. The situation worsened when Mylan N.V. MYL increased the price of its life-saving combination product EpiPen. This month, Clinton, in a statement on her website, announced measures to curb "unjustified" price hikes of lifesaving treatments, especially the ones that have been in the market for long.

However, the sector's fundamentals remain strong - strong pipelines, innovative treatments, impressive results, growing demand for drugs especially for rare-to-treat diseases, an aging population and increased health care spending should support growth.

Healthcare merger and acquisition activity is also gaining strength. This week, Bayer AG BAYRY announced that it will be acquiring Monsanto Company MON for $66 billion while Horizon Pharma plc HZNP announced its intention of buy Raptor Pharmaceuticals Corp. RPTP .

In August, Pfizer, Inc. PFE announced that it intends to buy oncology-focused Medivation, Inc. MDVN for approximately $14 billion. This was preceded by the buyout of Anacor in Jun 2016 and Hospira in Sep 2015. In Jun 2016, Shire plc SHPG acquired Baxalta to further strengthen its rare disease portfolio. Aegerion Pharmaceuticals AEGR and QLT Inc. QLTI entered into a definitive merger agreement in Jun 2016 to form a new company, Novelion Therapeutics Inc.

Merger and acquisitions are expected to increase in the back half of the year. Meanwhile, small bolt-on acquisitions, in-licensing activities and collaborations for the development of pipeline candidates are expected to continue.

4 Stocks to Buy

Given the strong fundamentals, biotech companies with new therapies or interesting pipeline candidates promise bountiful opportunities for investors. These stocks are well positioned in today's market environment and could see considerable upside riding on the aforementioned trends.

We have narrowed down the list of choices by focusing on stocks with a favorable Zacks Rank #1 (Strong Buy) or #2 (Buy) and a VGM score of 'A' or 'B.

PDL BioPharma, Inc. PDLI

Nevada-based, PDL BioPharma manages a portfolio of patents and royalty assets in the United States and Europe. The company is involved in the humanization of monoclonal antibodies and the discovery of a new generation of targeted treatments for cancer and immunologic diseases. It has a Zacks Rank #2 and a VGM score of 'B.'

The stock has also witnessed positive estimate revisions in the past 30 days.

Its 2016 earnings estimate rose 20% while that for 2017 is up a massive 200% over the past 30 days.

Vanda Pharmaceuticals, Inc. VNDA

This Washington-based biopharmaceutical company is focused on developing products for central nervous system disorders. Its estimated loss for 2016 narrowed down over the past 30 days while for 2017, estimates switched from a loss of 3 cents to earnings of 16 cents over the same time frame. It has a VGM score of 'B' and a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Exelixis, Inc. EXEL

Exelixis is a biopharmaceutical company focused on developing and commercializing small-molecule therapies for the treatment of cancer. It has a Zacks Rank #2 and a VGM score of 'B'. Its loss per share estimate for both 2016 and 2017 has narrowed down over the past 30 days.

Neogenomics Inc. NEO

This clinical laboratory specializes in cancer genetics diagnostic testing. It has a Zacks Rank #2 and a VGM score of 'A.'

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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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