You are using an older browser version. Please use a supported version for the best MSN experience.

Large-Cap Pharma Rebounds: 2 Stocks to Boost Your Portfolio

Zacks Equity Research logoZacks Equity Research 8/23/2018 Kinjel Shah

The large-cap pharmaceutical industry has regained its lost momentum in the past couple of months after a mild struggle in the initial part of the year, probably on broader market correction.

We believe that strong quarterly results, consistent increases in full-year guidance, new product sales ramp up with rising demand, successful innovation and product line extensions, strong clinical study results, and frequent FDA approvals have brought  the sector back on track this year. Also, many of these companies have accelerated their cost-saving initiatives to enable investment in new products to optimize long- and short-term growth.

Importantly, mergers and acquisitions (M&A) activity is ramping up with the tax reform in place. The new tax law has spurred merger activity this year, which, in turn, gives the broader industry a significant boost.

The biggest M&A deal announced this year is Takeda’s proposed acquisition of Shire for $62 billion. The deal is expected to close in the first half of 2019. Among the more recent deals, Lilly LLY acquired California-based immuno-oncology biotech, ARMO Biosciences in June while J&J JNJ agreed to buy private immunotherapy developer, BeneVir Biopharma. The deal is expected to close soon.

Sanofi SNY, Celgene CELG and Roche RHHBY have already snapped up two smaller companies each this year while Novartis NVS bought gene therapy company, AveXis for $8.7 billion in May. Impax Laboratories and Amneal merged in May to form a new company, Amneal Pharmaceuticals, Inc.

Bigwigs like Pfizer, Merck, J&J and Lilly among others have consistently announced co-development deals and small biotech acquisitions this year to drive innovation.

The Zacks Large Cap Pharmaceuticals Industry has outperformed the sector it belongs to on a year-to-date basis. While the stocks in this industry have collectively risen 5.4%, the Zacks Medical Sector has risen 3.5% year to date.

a close up of a map© Provided by Zacks-FinanceENUS

The NYSE ARCA Pharmaceutical Index has risen 6.7% so far this year.

Headwinds that can put pressure on the sector are government scrutiny of high drug prices, pricing and competitive pressure, concerns regarding Amazon’s interest in entering the healthcare arena and major pipeline setbacks. Most importantly, a slowdown in sales of some of the most high-profile older drugs, courtesy of payers and competitive pressure from both branded and generic drugs, is a concern for the sector.

However, pipeline success in innovative and important therapeutic areas, cost cutting, share buybacks, new product launches, increased M&A activity and appropriate utilization of cash should keep the sector afloat through rest of this year.

As the Large-Cap Pharma industry features among the top 41% of the 256 Zacks-ranked industries, it makes sense to look at some Buy-ranked stocks in the space.

Investing in stocks with a large market cap is a much more prudent move because of the fact that they control a large portion of the given industry. Also companies with a larger market cap have performed well in 2018 and look well poised to earn higher profits in 2019.

Here we look at two large-cap pharma companies that carry a favorable Zacks Rank -- #1 (Strong Buy) or #2 (Buy).

Eli Lilly & Company

Lilly currently carries a Zacks Rank #2. Lilly’s earnings estimates increased 5% for 2018 and 1.8% for 2019 over the last 30 days. The company delivered a positive earnings surprise in each of the trailing four quarters, with an average beat of 10.15%. The company’s shares have increased 24.4% year to date.

Lilly’s new products like Trulicity, Taltz, Basaglar, Cyramza, Jardiance and Lartruvo are 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. Important regulatory approvals so far this year included FDA approval of JAK inhibitor, Olumiant (baricitinib), label expansion of breast cancer drug Verzenio in the first-line setting and Taltz for genital psoriasis. Meanwhile, several key regulatory and pipeline events are expected in the second half. 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.

Bristol-Myers Squibb Company BMY

Bristol-Myers sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Bristol-Myers’ earnings estimates increased 4.7% for 2018 and 4.6% for 2019 over the last 30 days. The company delivered a positive earnings surprise in three of the trailing four quarters, with an average beat of 6.39%.

Bristol-Myers’ high-profile PD-L1 inhibitor, Opdivo is approved in several countries including the United States, the EU and Japan for several cancer indications. It has become a key driver of top-line growth at the drug giant along with atrial fibrillation drug, Eliquis. Meanwhile, several label expansion applications for Opdivo are under review in the United States and Europe. Potential approval will further boost the prospects of this blockbuster drug. Bristol-Myers’ other cancer drugs like Empliciti for multiple myeloma and Sprycel for different forms of leukemia are also gaining traction. Like Lilly, Bristol-Myers is highly active on the deal signing/acquisition front.

Other Large Caps That Have Done Well

Several large drug companies have done well this year so far. These include Merck, AbbVie, Pfizer, AstraZeneca, Allergan and Glaxo. Though these carry a Zacks Rank #3 (Hold), most of them have seen their share price rise this year so far and also witnessed positive earnings estimate revisions.

The Hottest Tech Mega-Trend of All                

Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce ""the world's first trillionaires,"" but that should still leave plenty of money for regular investors who make the right trades early.

See Zacks' 3 Best Stocks to Play This Trend >>


  • Oil prices have been volatile. How are you reacting?

    Not scientifically valid. Results are updated every minute.

    Total responses:21849VOTES

More From Zacks Equity Research

image beaconimage beaconimage beacon