The year 2017 has turned out to be pretty impressive for the pharma/biotech stocks. Though the industry was hampered by drug pricing issues in 2016, it bounced back and made a considerable headway in 2017, courtesy of a slew of FDA approvals. The regulatory body approved 46 novel drugs last year, easily surpassing 2016’s total tally of 22.
Particularly, large-cap players in the industry raked in stellar returns, up 15.8% in the last 12 months. Nonetheless, the same space also posted a 5.2% decline in 2016.
Upbeat quarterly results, rise in demand for new product sales, successful innovation and product line expansion, strong clinical study results as well as a continued strong performance of legacy products propelled the large-cap drug sector to scale new highs in 2017. Moreover, these tailwinds are expected to drive the sector’s growth in 2018.
Meanwhile, jubilant Republicans have of late passed the tax overhaul bill for the first time in 30 years. The bill slashes corporate tax rates from 35% to 21%. Such tax reduction is likely to further boost profit margins of these companies with more cash left in hand. This, in turn can also be used for striking strategic deals this year, which were relatively fewer in 2017.
Notably, the Large Cap Pharmasub-industry carries a Zacks Industry Rank of #104, placing it among the top 39% of the 265 plus Zacks industries. Our backtesting shows that the top 50% of the Zacks ranked industries outperforms the bottom half by a factor of more than two to one.
Banking on such positive trends, investing in sound large-cap pharma stocks this year seems judicious. We have therefore identified three Large Cap stocks based on a favorable combination of a solid Zacks Rank #1 (Strong Buy) or 2 (Buy) and a strong VGM Score of A or B. These stocks are backed by sound fundamentals and ensure a steady stream of cash inflows.
Back-tested results show that only stocks with an impressive VGM Style Score of A or B when combined with a bullish Zacks Rank of 1 or 2, offer the best upside potential.
