The spate of pharma M&A deal announcements this year so far has helped drugmakers to post a recovery after a dismal run toward the end of 2018.
A key announcement was Bristol-Myers’ BMY offer to buy Celgene CELG for $74 billion, one of the biggest mergers in the industry. Other important acquisition announcements include Lilly’s LLY purchase of small cancer biotech, Loxo Oncology, and Merck’s MRK acquisition of Immune Design and pending acquisitions of small private cancer biotechs, Peloton Therapeutics and Tilos Therapeutics. Roche RHHBY is also due to acquire Spark Therapeutics for $4.8 billion, per a deal announced in February.
The Zacks Large Cap Pharmaceuticals industry, comprising some of the biggest drugmakers in the world, has gained 1.9% in 2019 so far. Moreover, the industry features in the top 15% of the 255 Zacks-ranked industries.
We believe that new product sales ramp up as a result of rising demand, driven by growth in ageing population, successful innovation and product line extensions in important therapeutic areas, strong clinical study results, and frequent FDA approvals (12 new drugs approved so far in 2019), helped the big drug giants to do well this year despite broader macro issues or the industry’s own challenges. The industry is likely to perform well even if the global economy slows down this year, as is widely expected. This is because it is a defensive sector, which is almost insulated from broader macroeconomic factors.
Meanwhile, most big pharma companies are resorting to restructuring activities, which is increasing their financial capacity. The funds can be used to re-stock pipelines with promising new drug candidates bought from smaller innovative drug/biotech companies.
However, the sector faces its share of headwinds like government scrutiny of high drug prices, pricing and competitive pressure, generic competition for blockbuster treatments, slowdown in sales of some of the most high-profile older drugs and most importantly major pipeline setbacks.
Nonetheless, we believe pipeline success, cost cutting, share buybacks, product launches, increased M&A and collaboration activity and appropriate utilization of cash should keep the sector afloat through the rest of this year.
In this scenario, investing in stocks with a large market cap is a prudent move, given the fact that they control a large portion of the industry.
Here we have highlighted three bigshot drugmakers, which may prove to be good buys. All these stocks carry a Zacks Rank #2 (Buy) and have seen share price rally in the past year and positive estimate revisions in the past 60 days.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
A chart showing the share price movement of the three stocks and the Large Cap Pharmaceuticals industry in the past one year is given below.
Merck
Shares of Merck have risen 32.6% in the past year. Merck’s earnings estimates for 2019 and 2020 have gone up 1.7% and 0.6%, respectively in the past 60 days.
Like 2018, a significant part of Merck’s outperformance this year so far has been driven by strong performance and positive regulatory updates related to its PD-1 inhibitor, Keytruda.
In addition to Keytruda, Merck’s other new products, Lynparza, and Bridion are contributing meaningfully to its top line. Merck has also been on a strong footing in terms of collaborations and M&A activity. This year, Merck bought small cancer focused biotech, Immune Design and privately held Europe’s animal health technology provider, Antelliq Group. Merck also announced definitive agreements to buy small private cancer biotechs, Peloton Therapeutic and Tilos Therapeutics.
Meanwhile, Merck’s animal health and vaccine products are also performing strongly and remain core growth drivers. Also, Merck can gain approval for two new products this year, a vaccine for Ebola Zaire, V920 and an anti-bacterial medicine, MK-7655A, which is a fixed combination of relebactam with imipenem/cilastatin.
Roche
Roche’s earnings estimates have increased 2.1% for 2019 and 1.3% for 2020 over the past 60 days. The company’s shares have increased 28.7% this year so far.
Roche has gained regulatory approvals for label expansions of its PD-L1 inhibitor, Tecentriq, leukemia drug, Venclexta, rheumatoid arthritis (RA) drug, MabThera and hemophilia drug, Hemlibra this year. These approvals have expanded the eligible patient population for these drugs, mainly Tecentriq, which can drive sales of Roche higher in the future quarters.
Moreover, the acquisition of Spark will enable Roche to have a foothold in the promising gene-therapy space as it faces stiff competition from biosimilars for key drugs such as Avastin, Rituxan and Herceptin from Novartis and Amgen. Meanwhile, the company continues to progress with its pipeline. It is looking to restructure the portfolio beyond oncology into multiple sclerosis and hemophilia, among others
Pfizer PFE
Pfizer’s stock has risen 17.8% in the past year. Its earnings estimates for 2019 have risen 1.05% in the past 60 days.
Pfizer is witnessing strong growth of key product franchises, including Ibrance, Eliquis, and Xeljanz. To offset the threat of generic competition mainly due to expected loss of exclusivity of key drug Lyrica in the United States in June, Pfizer is strengthening its pipeline as well as oncology portfolio. Pfizer looks well positioned to deliver several potential new breakthrough innovative medicines in the next five years, which can drive long-term growth.
In oncology, Pfizer gained FDA approval for four innovative medicines, Daurismo, Lorbrena, Vizimpro and Talzenna, in the last four months of 2018, which can boost its oncology sales in 2019. Last month, it gained key FDA approvals for Bavencio in combination with Inlyta (axitinib) for first-line treatment of advanced renal cell carcinoma (RCC) and tafamidis to treat transthyretin amyloid cardiomyopathy (ATTR-CM), a rare and fatal illness associated with progressive heart failure. Its biosimilar drugs are also expected to contribute to growth in 2019.
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