Ebola virus disease fears coupled with the lack of any approved treatment for Ebola has brought the spotlight on health care companies like Tekmira Pharmaceuticals Corp. (TKMR), Johnson & Johnson (JNJ) and GlaxoSmithKline (GSK) among others researching on Ebola vaccines or treatments. U.S. government agencies are working closely and providing support as well as funding to the companies developing vaccines/treatments targeting Ebola. With investors glued on Ebola vaccine/treatment related updates, companies working on Ebola therapies stand to make the most of the current furor.
On the other hand, tax-saving reverse mergers, which had until recently become a rage, have somewhat fizzled out owing to uncertainty surrounding proposed changes in U.S. tax laws. Earlier this month, AbbVie Inc. (ABBV) abandoned its plans to acquire Shire (SHPG) on proposed anti-inversion policies. The deal, valued at approximately $54.5 billion, was set to complete by year end.
However, tax saving is not the sole motivation behind reinvigorated M&A activities in the health care sector currently. Cash-rich companies are on the lookout for other players that have a portfolio of potential multi-million dollar products or lucrative pipeline candidates. Valeant Pharmaceuticals International, Inc. (VRX) is looking to acquire Allergan (AGN) to strengthen its portfolio. However, Allergan has stated that Valeant’s latest acquisition offer significantly undervalued the company. Another company rumored to be interested in Allergan is Actavis (ACT).
Despite the patent cliff being mostly over, some health care companies have continued to witness declining sales in the third quarter of 2014 owing to genericization. Several health care companies now have fewer blockbuster products. Increasing competition for legacy products in the form of newer therapies is also affecting sales. Merck (MRK) and Glaxo reported disappointing revenues in the third quarter – the former due to patent expiries of key products and the latter facing the brunt of increasing competition for Advair.
Health care companies have been resorting to share buybacks, restructuring, streamlining of operations, divestment of non-core/redundant assets to boost the bottom line. Amgen (AMGN) has initiated a company-wide restructuring, which involves the reduction of 20% of its workforce and approximately 23% of the facilities footprint by the end of 2015.
Some of the companies are also increasing their dividends to increase shareholder returns.
Thus, it may be a good idea to look at some companies in the health care sector that have the potential to beat earnings in their upcoming releases. These stocks are well positioned in today’s market environment, and could see considerable upside riding on the aforementioned trends. An earnings beat should help these stocks gain investor confidence and show a favorable price movement.
How to Pick?
Given a large number of industry participants, pinpointing stocks that have the potential to beat estimates could appear to be a daunting task. But our proprietary methodology makes it fairly simple. One way to narrow down the list of choices this earnings season is by looking at stocks that have the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Zacks Earnings ESP.
Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.
Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
Below are three health care stocks we believe are best positioned to stand out this earnings season.
Endo International (ENDP), based in Dublin, Ireland, is a Zacks Rank #2 (Buy) stock with an Earnings ESP of +1.01%. The Zacks Consensus Estimate for the third quarter 2014 is 99 cents. The company is set to acquire Auxilium Pharmaceuticals Inc. (AUXL) for approximately $2.6 billion.
Endo, a specialty health care company, develops, manufactures, markets, and distributes branded pharmaceutical, generic products and medical devices worldwide. The company has a solid track record of delivering positive surprises with an average beat of 12.27% in the last four quarters. The company is expected to beat expectations in the third quarter as well. Endo’s Generic Pharmaceuticals (U.S.) segment should continue to perform well benefiting from high-valued branded drugs going off patent. The company’s cost-cutting initiatives should also help boost earnings.
-Endo is scheduled to announce its third-quarter 2014 financial results before the opening bell on Nov 5.
Infinity Pharmaceuticals, Inc. (INFI) is a Zacks Rank #3 (Hold) stock with an Earnings ESP of +14.94%. The Zacks Consensus Estimate for third quarter 2014 is a loss of 87 cents. The company has registered positive earnings surprises in three of the last four quarters with an average beat of 4.56%.
The Cambridge, MA-based biopharmaceutical company is engaged in discovering and developing treatments for difficult-to-treat diseases. Infinity Pharma, which does not have any approved product in the market, is expected to recognize upfront revenues related to its agreement with AbbVie to develop cancer drug, duvelisib.
– Infinity Pharma will be reporting third-quarter 2014 results after market close on Nov 6.
Karyopharm Therapeutics, Inc. (KPTI), based in Newton, MA, is focused on the discovery and development of novel first-in-class drugs directed against nuclear transport targets for the treatment of cancer and other major diseases. The stock carries a Zacks Rank #3, with an Earnings ESP of +11.32%. The Zacks Consensus Estimate for the to-be-reported quarter is a 53 cent loss.
Although the surprise history for the clinical-stage pharmaceutical company has been unimpressive, it is poised for a beat this season. The company’s lead pipeline candidate selinexor with promising potential enjoys two orphan drug designations from the FDA for the treatment of acute myeloid leukemia and diffuse large B-cell lymphoma.
– Karyopharm is expected to report third-quarter 2014 results on Nov 6.
While a number of health care companies are seeing an improvement in their financial results, challenges in the form of increasing competition and pricing pressure remain in the sector. The companies are nevertheless looking for better strategies to emerge as winners. A sneak peek at the space for some outperformers, backed by a solid Zacks Rank and a positive Zacks Earnings ESP, could be a great idea for investors to gain from this earnings season.
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— Zacks Investment Research