Market watchers still quibble over whether the equity market entered bear market territory or underwent a correction in year-end 2018. But there is little debate over the fate of pharma stocks during this period. The sector plummeted last fall with the SPDR S&P Biotech ETF (XBI) falling 35% from the peak achieved in September. This is a bear market in no uncertain terms.
However, biotech got off to a far better start this year, with the XBI up 17.7% year to date. A spate of deal-making revived the sector in January, marked by some of the largest mergers in the history of the industry.
While the specter of pricing pressure hangs over biotech, the sector retains the ability to provide outsized gains. For investors with a substantial risk appetite, biotech retains the promise of strong returns in 2019. This is why it makes sense to pick up strong, cheap performers from the sector, priced below $10.
2019 to Witness Spurt in Deal-Making
Earlier in January, Bristol-Myers Squibb (BMY – Free Report) announced it was purchasing Celgene (CELG – Free Report) for $74 billion in a cash and stock deal. The very next week, Eli Lily (LLY – Free Report) said it was acquiring cancer drug marker Lexi Oncology (LOXO – Free Report) for $8 billion. This continued last year’s trend of frenetic deal making. Notably, Takeda Pharmaceuticals (TAK – Free Report) acquired Shire for $8 billion.
And healthcare sector deals are likely to increase 7% over last year to $331 billion in 2019. This prediction was made in a report issued jointly by Oxford Economics and Chicago-based law firm Baker McKenzie. This is a welcome change from the 5% decline experienced last year. It also does not include the deals involving Eli Lily and Bristol-Myers Squibb.
Pricing Pressure Likely, Ability to Boost Gains Remain
Following the recent mid-term elections, frenetic legislative activity is being witnessed on the pricing pressure front. At this point, it seems that Democrats and Republicans may yet make common cause on the issue. However, the Trump administration’s proposal to crack down on pharmacy benefit managers (PBMs) could spare the pharma industry some blushes.
Ultimately, the industry will have to learn how to survive in an increasingly cost-conscious environment. However, pharma companies that are able to produce truly innovative treatments retain the potential of generating outsized profits. This is because they are able to erect formidable competitive moats in the process.
Further, any positive data on drug trials and approvals creates significant excitement and could boost the pharma stock in question considerably. At the same time, several sector members are small-cap stocks in terms of market capitalization. Their small size and low float provide them with the ability to surge in the event of any positive news.
After a disastrous end to 2018, pharma stocks have started the New Year on a considerably strong note. A flurry of deal-making in January has boosted the sector and M&A activity is likely to remain strong through most of the year. While the specter of pricing pressure remains, the sector retains the ability to deliver outsized gains.
This is why it makes sense to invest in select biotech stocks, which aren’t a pinch on your pocket as they are trading below $10. We have narrowed our search to the following stocks based on a good Zacks Rank and other relevant metrics.
BioDelivery Sciences International, Inc. (BDSI – Free Report) is a specialty pharmaceutical company focused on the development and commercialization of treatments in the areas of pain management and drug addiction.
BioDelivery Sciences has a Zacks Rank #1 (Strong Buy). The company has expected earnings growth of 68.2% for the current year. The Zacks Consensus Estimate for the current year has improved by 12.7% over the last 30 days. The stock’s last closing price is $4.36.
Cytokinetics, Incorporated (CYTK – Free Report) is a late-stage biopharmaceutical company focused on discovering, developing and commercializing first-in-class muscle activators as potential treatments for debilitating diseases.
Cytokinetics’s expected earnings growth for the current year is 11.9%. The Zacks Consensus Estimate for current-year earnings has improved by 0.2% over the past 30 days. The stock’s last closing price is $7.58. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Celldex Therapeutics, Inc. (CLDX – Free Report) is a development-stage biopharmaceutical company focused on the development and commercialization of immunotherapy technologies and other cancer-targeting biologics.
Celldex Therapeutics has a Zacks Rank #2 (Buy). The company has expected earnings growth of 60% for the current year. The Zacks Consensus Estimate for current-year earnings has improved by 15.8% over the past 30 days. The stock’s last closing price is $4.99.
Aduro Biotech has a Zacks Rank #2. The company has expected earnings growth of 34.7% for the current year. The Zacks Consensus Estimate for current-year earnings has improved by 32.2% over the past 30 days. The stock’s last closing price is $3.50.
Aeterna Zentaris has a Zacks Rank #2. The company has expected earnings growth for the current year is more than 100%. The Zacks Consensus Estimate for current-year earnings has improved by more than 100% over the past 30 days. The stock’s last closing price is $4.15.
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