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4 Biotech Stocks Investors Can Bet on Post Solid Q2 Earnings

Zacks Equity Research logoZacks Equity Research 8/23/2018 Ekta Bagri

The second-quarter earnings season is almost over with 93.4% of the S&P 500 stocks (467 companies) having reported results as of Aug 17, 2018. Earnings of these 467 companies are up 25.5% from the year-ago period on revenue growth of 9.9%. While 79.2% beat earnings estimates, 72.8% topped revenue expectations. 

The Medical sector is one of the sectors to have consistently recorded earnings growth over the last few quarters. Biotech stocks, specifically, fared pretty well in the second quarter with most bigwigs topping earnings and revenue expectations. Quite a few companies raised their outlook for the year as well. While issues like drug pricing and competition remain headwinds, investors now seem to be more comfortable with the drug pricing scenario and are willing to consider the fundamentals of the sector. Moreover, it is widely expected that the sector will rebound in the second half of the year.

The FDA has already approved 31 drugs so far in 2018 compared with 46 drug approvals in 2017. New drug approvals boosted investor sentiment to a certain extent in the first half. Moreover, the approval of these drugs should boost their respective companies’ top line as a few of them are struggling with a decline in sales of legacy drugs. 

We believe new drug approvals, label expansion of existing high-profile drugs, pipeline progress, growing demand for drugs, especially for rare-to-treat diseases, an aging population and increased health care spending are some of the factors that should positively impact performance.

Owing to competitive pressure, quite a few companies have resorted to cost-cutting initiatives, which, in turn, should somewhat drive the bottom line.

Meanwhile, mergers and acquisitions (M&A) have picked up pace in the sector as a slowdown in mature products has forced companies to eye lucrative acquisitions to bolster their pipeline. Additionally, the increase in M&A activity is also being propelled by the implementation of the new tax law, which has lowered corporate tax rate from 35% to 21%.  The new tax reform is also luring corporates to bring back huge cash held overseas at a one-time tax rate of 10%. We expect many more such deals in the second half as well. Licensing deals should continue especially in orphan and rare disease areas as well as highly sought-after therapeutic areas like immune-oncology.

Our Picks

Here were take a look at four biotech stocks that delivered positive earnings surprise in the second quarter and are witnessing upward revisions in earnings estimates for 2018. All these companies are either Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) stocks.  You can see  the complete list of today’s Zacks #1 Rank stocks here.

Gilead Sciences, Inc. GILD: Foster City, CA-based Gilead is well known for its presence in the hepatitis C virus (HCV) and HIV markets. Gilead’s second-quarter results beat estimates on the strength of its HIV franchise. The franchise is driven by the rapid adoption of Descovy-based regimens. The FDA approval of Biktarvy has further widened the portfolio. Biktarvy has also been approved in Europe, which should boost sales further. The launch of Yescarta is progressing well in the United States and the CHMP gave a positive opinion on the same (tentative approval in the third quarter). Meanwhile, Gilead intends to foray into the NASH market with selonsertib and filgotinib.

The Zacks Consensus Estimate for current-year earnings has been revised almost 6.8% upward over the past 30 days. Gilead is a Zacks Rank #1 stock. Gilead’s stock has gained 4.6% in the year so far against the industry's decline of 4.5%.

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Celgene Corporation CELG: Summit, NJ-based Celgene is a biopharmaceutical company focused on the discovery, development and commercialization of drugs targeting cancer and inflammatory diseases through next-generation solutions in protein homeostasis, immuno-oncology, epigenetic, immunology and neuro-inflammation. Celgene’s key growth engine is Revlimid. The company's portfolio also includes Pomalyst/Imnovid, Abraxane, Otezla, Istodax, Vidaza and Thalomid/Thalidomide.

Celgene’s second-quarter results were impressive as the company beat on both sales and earnings. Revlimid sales were impressive yet again, along with that of Pomalyst and Otezla. The increase in annual guidance on the back of Revlimid sales should boost investors’ sentiment, given the recent spate of pipeline setbacks.  The company is focused on the next cycle of innovation with five late stage candidates. In a bid to revive its pipeline, Celgene acquired Juno Therapeutics and added JCAR017 to its lymphoma pipeline.

Celgene currently carries a Zacks Rank #2. Earnings estimates for 2018 have increased 22 cents in the past 30 days. Celgene’s shares have gained 14% in the last three months.

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Vertex Pharmaceuticals Incorporated VRTX: Boston, MA-based Vertex Pharmaceuticals Incorporated is focused on the discovery, development, and commercialization of small molecule drugs targeting serious diseases. The company’s main area of focus is cystic fibrosis (CF) and Vertex is a dominant player in that space.

Consistent increase in eligible patient population for Vertex’s leading CF drugs, Kalydeco & Orkambi, is driving top-line growth for the company. Vertex’s third CF drug, Symdeko, a tezacaftor/ivacaftor combo was approved in the United States in February and is off to a strong start. Symdeko is expected to be a significant contributor to growth in 2018.

Vertex , a Zacks Rank #2 stock, has gained 18.6% year to date. Earnings estimates for 2018 have increased 18.7% in the past 30 days.

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Regeneron Pharmaceuticals, Inc. REGN: Tarrytown, NY-based Regeneron's key areas of focus include eye diseases, heart disease, allergic and inflammatory diseases, pain, cancer, infectious diseases and rare diseases. While eye drug, Eylea, the company’s key growth driver, continues to perform well, Regeneron has been working on diversifying its portfolio and gained FDA approval for Dupixent (moderate-to-severe atopic dermatitis) and Kevzara (moderately to severely active rheumatoid arthritis) in 2017.

Dupixent gained traction and drove top-line growth in the second quarter. Regeneron’s efforts to expand the label of its approved drugs and concurrently develop its pipeline are encouraging as well. The recent label expansion of Eylea in patients with wet age-related macular degeneration (modified 12-week dosing) will further boost sales. The company is also working to expand Dupixent’s label, which should diversify the company’s revenue base and reduce dependence on Eylea. Cemiplimab’s progress looks promising as well.

The Zacks Consensus Estimate for current-year earnings has been revised 7.2% upward in the past 30 days. Regeneron, a Zacks Rank #2 stock, has gained 1.1% year to date.

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