The drug/biotech industry has seen a mixed performance in the past six months. The Large Cap Pharmaceuticals sector (comprising some of the biggest drugmakers in the world) has gained 6.5% compared with the S&P 500’s increase of 1.6%.
However, the riskier Medical-Biomedical and Genetics sector, which includes large as well as small biotech companies, has underperformed the S&P 500. The biotech industry has declined 10.3% against the S&P 500 increase of 1.6%, probably because of some pipeline setbacks faced by the industry.
Rising demand for new products, rampant innovation and product line extensions, strong clinical study results and frequent FDA approvals keep this sector on the growth track. Merger and acquisition (M&A) activity is gaining momentum with the new tax reform in place which is obviously a boon for any sector.
Meanwhile, government scrutiny of high drug prices, pricing and competitive pressure, slowdown in sales of some of the most high-profile older drugs and major pipeline setbacks act as deterrents.
Nonetheless, the drug/biotech industry is expected to recover from here. We believe that pipeline success, cost cutting, share buybacks, product launches, increased M&A and collaboration activity as well as appropriate utilization of cash should act in favor of the drug/biotech sector.
How to Pick Potential Q3 Winners?
There are a number of drug/biotech companies poised to surpass third-quarter estimates. However, given the large number of drug/biotech firms, the task of selecting stocks with possibilities to beat could appear quite daunting.
With the help of the Zacks Stock Screener, we have zeroed in on five drug/ biotech stocks that carry a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and have a positive Earnings ESP. It is a valuable tool for investors looking for stocks that are most likely to beat earnings estimates. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
