The second-quarter reporting cycle has almost ended with only nine S&P 500 stocks left to report as of Aug 25, 2017. All the sectors, excluding Auto and Conglomerates, have recorded earnings growth in the quarter. Total earnings increased 11.2% in the second quarter on the back of 5.6% revenue growth from the year-ago period.
The pharma and biotech sector has performed well in the first half. The sector was in turmoil in 2016 due to the drug pricing controversy brought forward by presidential candidate, Hillary Clinton in her campaign. However, defying all odds and uncertainties surrounding Obamacare, the sector has turned around this year. Although drug pricing risk still persists, investors are seemingly comfortable with the scenario and are focused on the fundamentals.
The NYSE ARCA Pharmaceutical Index has risen almost 10% year to date (YTD) after declining almost 10% last year. The NASDAQ Biotechnology Index is up 25.9% YTD after sliding 19.1% in 2016.
In fact, the Zacks Drugs sector is up 9.6% YTD. However, the S&P 500 has risen 10.6% in the period.
Impressive 1H & Rising Approvals
The Medical sector had recorded earnings growth of 5.7% on revenue growth of 5.8% in the first quarter. In the second quarter, with 98.2% of companies having reported so far, earnings have grown 6.7% on revenue growth of 4.2%. A look at the beat ratio shows earnings beat of 83.3% and revenue beat of 64.8% in the second quarter.
Within the sector, biotech stocks performed particularly well as most of the key players beat earnings and revenue expectations. A few companies in the sub sector have also raised their outlook for 2017. Sales of new drugs were also impressive, which is expected to offset the impact of genericization of key drugs to an extent. Moreover, pipeline candidates have progressed well as evident from the positive results announced in the first half. The companies are also focusing on newer categories like gene editing, NASH and Parkinson's disease.
Based on the present trend, 2017 is expected to see far more approvals than 2016. The agency has already approved a total of 31 drugs so far this year compared to 22 for the whole of 2016.
Meanwhile, tax reforms and cash repatriation policies should give pharma/biotech companies more cash flexibility to pursue acquisitions/deals.
However, with many companies fighting to bring their therapies to the market, competition is intensifying. Loss of exclusivity for certain key drugs, high profile pipeline setback and drug pricing issue still remains a concern for the sector.
Nonetheless, the rest of 2017 is expected to be eventful with quite a few companies expected to announce data on their pipeline candidates being developed across a wide range of therapeutics areas. We note that the first half was rather quiet in terms of mergers & acquisitions and collaborations/deals. However, there are chances that it will pick up in the second half, beginning with Gilead’s acquisition of Kite Pharma for almost $12 billion.
Stocks in Focus
Given this favorable scenario, many biotech stocks have shown an impressive run in 2017. Here are four biotech companies whose share price has more than doubled so far this year.
Puma Biotechnology, Inc. (PBYI)
Los Angeles, CA-based Puma’s first marketed drug, neratinib was approved by the FDA for the treatment of advanced breast cancer in July 2017 and subsequently launched in August under the brand name, Nerlynx. The drug is under review in the EU with a response expected in early 2018. Nerlynx FDA approval was a major boost for Puma given the immense commercial potential in the target market.
Shares of Pumahave surged 206.7% so far this year, outperforming the gain of 15.4% for the industry.
The company has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Alnylam Pharmaceuticals, Inc. (ALNY)
This Cambridge, MA-based company has made major progress in its pipeline during the first half. In July, Alnylam advanced its hemophilia candidate, fitusiran, to phase III study. Patisiran demonstrated potential to halt or improve neuropathy progression in patients with hATTR amyloidosis in a phase II study. Data from a phase III study is expected this year with a new drug application expected to be filed by year end.
Givosiran, developed for acute hepatic porphyrias, in June 2017 showed potential in preventing porphyria attacks in patients with acute intermittent porphyria (AIP) suffering recurrent attacks in a phase I study. The company expects to initiate a phase III study by year end.
The company’s shares are up 120.4% so far this year, significantly outperforming the industry’s gain of 15.3%.
Alnylam carries a Zacks Rank #3.
Kite Pharma, Inc. (KITE)
The company’s shares are up 296.8% so far this year, significantly outperforming the industry’s gain of 15.3%. Its CAR-T therapy axicabtagene ciloleucel is nearing approval.
However, Kite Pharma, has agreed to be acquired by Gilead for approximately $11.9 billion. The deal, which is expected to close in the fourth quarter of 2017, also gave a major push to the share price
Axicabtagene ciloleucel, for treating aggressive non-Hodgkin lymphoma (NHL), is under priority review in the U.S. A decision from the FDA is expected on Nov 29. We believe the solid efficacy profile demonstrated by the pivotal ZUMA-1 study of axicabtagene ciloleucel is likely to support the drug’s approval this year. In Europe, a regulatory application was filed in July 2017 with approval and launch expected next year.
Kite Pharma carries a Zacks Rank #3.
Vertex Pharmaceuticals Inc. (VRTX)
Shares of this Boston, MA-based company have increased 107.5% so far this year compared with the industry’s gain of 15.3%.
Vertex’s two CF drugs – Kalydeco & Orkambi – have performed well with combined sales increasing almost 21.5% year over year.
Its CF pipeline is quite strong with a broad portfolio of next-generation CF correctors.
The company is evaluating some next-generation CFTR correctors (VX-152, VX-440, VX-659 and VX-445) as part of a triple combination withtezacaftorand Kalydeco.
Data from VX-152 and VX-440 phase II and VX-659 phase I triple combination studies were presented in July 2017. The data demonstrated that all three combinations led to pronounced improvement in lung function. In fact, these are the first data to show the potential to treat the underlying cause of CF in patients who have a severe and difficult-to-treat type of the disease.
Following discussions with regulatory agencies, Vertex will initiate pivotal phase III studies on one or two of the four triple combination regimens in the first half of 2018.
If the triple-combo regimes are successful, Vertex can address a significantly larger CF patient population– almost 90% of patients with CF – in the future.
Vertex carries a Zacks Rank #3.
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