3 Pharma/Biotech Sector Bargains For A Healthy Portfolio
Zacks Investment Research | Sep 12, 2017 11:25PM ET
After a lackluster performance in 2016, the drug/biotech sector has shown promise since the beginning of 2017. With no major announcement related to drug pricing control since Trump’s election as President, investors are breathing a sigh of relief. Drug pricing controversy was one the major issues that hurt the industry last year.
The FDA is planning to streamline the review process for generics for speeding up approval. It suggested that instead of any direct measures for price control, the Trump administration is trying to control drug prices through competition. As the uncertainty clears, more and more investors are expected to put their money in biotech companies, pulling their shares up.
Meanwhile, the acquisition of Kite Pharma, Inc. (NASDAQ:KITE) by Gilead Sciences, Inc. (NASDAQ:GILD) for almost $11 billion has set the stage for further merger and acquisition (M&A) deals. Also, the industry should benefit from tax reforms - once it makes its way through Congress. These reforms aim at allowing companies to bring back profits stored overseas at lower rates.
However, controversies and rumors surrounding scrapping of Obamacare and passing of Trump’s proposed health care bill persist. A report from the Congressional Budget Office estimates that abolishing Obamacare will increase the number of uninsured people, running into millions, which will affect the demand for expensive medical procedures and devices.
The rally is expected to continue on the back of an increase in demand for drugs due to a rise elderly population and prevalence of a wide variety of diseases. Drug/biotech companies are investing in developing innovative treatment with many clinical studies showing impressive results so far.
Favorable Industry Rank and Price Performance
The broader Drugs market is up 12.4% year to date, having outpaced the 11.5% gain for the S&P 500.
Two of the four Zacks industries — Medical-Biomed and Genetics and Large-Cap Pharma have outperformed the S&P 500 Index.
The Zacks Industry Rank is #96 (top 38% of the 250 plus Zacks industries) for Medical-Biomed and Genetics, #91 (top 36%) for Medical-Drugs, #56 (top 22%) for Large-Cap Pharma and #245 (bottom 4%) for Generic Drugs. Our backtesting shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
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