Zacks Investment Research | Nov 05, 2018 07:55AM ET
It is usually believed that that drug biotech sector is a safe haven for investors as the sector enjoys strong fundamentals.
Large Cap Pharma/Biomed/Genetics Sector vs. S&P 500
The performance of the drug/biotech space has been mixed in the past six months. The Large Cap Pharmaceuticals sector (comprising some of the biggest drugmakers in the world) has gained 9.8% compared with the S&P 500’s increase of 1.8%.
However, the riskier Medical-Biomedical and Genetics sector, which includes large as well as small biotech companies, has underperformed the S&P 500. The biotech sector has declined 3.6% against the S&P 500’s increase of 1.8%, probably because of some pipeline setbacks.
Demand driven growth in sales of new products, successful innovation and product line expansion, strong clinical study results, frequent FDA approvals, adoption of new technologies, growing demand for drugs, especially for rare-to-treat diseases, an aging population and increased health care spending are some of the factors driving this industry’s growth this year. A faster drug approval process and the proposed removal of outdated regulations, which are escalating costs and slowing down innovation, are the other positives.
Mergers and acquisitions (M&A) activity is on the rise following the tax reform. Big players are on the lookout for companies with innovative pipelines/technology. Meanwhile, in-licensing deals continue to be popular with several big companies collaborating with smaller and mid-sized players with promising mid-to-late stage pipeline candidates or interesting technology.
However, government scrutiny of high drug prices, pricing and competitive pressure, slowdown in sales of some of the most high-profile older drugs and major pipeline setbacks are concerns for the sector.
Nonetheless, the drug/biotech sector is expected to recover from here. We believe that pipeline success, cost cutting, share buybacks, product launches, increased M&A and collaboration activity as well as appropriate utilization of cash should act in favor of the drug/biotech sector.
Q3 Earnings So Far
The drug/biotech sector’s performance has been mixed so far in the third-quarter earnings season. While many bigwigs beat estimates for earnings, they either missed the mark on sales or matched the same. Though a number of companies raised their earnings expectations, the same cannot be said about sales.
According to the Zacks Investment Research
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