The second quarter earnings season is drawing to a close with 94.8% of S&P 500 stocks having reported results as of Aug 18, 2017. Thirteen of the 16 Zacks sectors recorded earnings growth with total earnings increasing 10.6% from the year-ago period on revenue growth of 5.6%. While 74.9% beat earnings estimates, 68.4% topped revenue expectations.  

The Medical sector is one of the sectors to consistently record earnings growth over the last few quarters. The sector, which recorded earnings growth of 5.7% on revenue growth of 5.8% in Q1, has recorded earnings growth of 6.7% on the back of revenue growth of 4.3% so far in Q2. A look at the beat ratio shows earnings beat of 82.7% and revenue beat of 67.3%.

Biotech stocks specifically fared pretty well with most of the key players topping earnings and revenue expectations. Quite a few companies raised their outlook for the year as well. Biotech stocks have had a strong run so far in 2017 with the NASDAQ Biotechnology Index soaring 15% year-to-date (YTD). This is in sharp contrast to last year’s performance when the Index was down 19.1%. There were several reasons for the sector’s dismal performance last year foremost being the drug pricing controversy. Although drug pricing remains a headline risk this year as well, investors now seem to be more comfortable with the drug pricing scenario and are willing to look at the fundamentals of the sector.

The FDA has also approved more drugs so far this year than it did in the whole of 2016. Last year, 22 drugs were approved while 28 have gained approval so far in 2017. Some of the drugs approved this year represent blockbuster potential.

The second half of 2017 is expected to be catalyst rich for quite a few companies with data expected across a wide range of therapeutics areas. As far as mergers and acquisitions are concerned, we do not expect much activity in this area given the “wait and watch” stance adopted by most companies regarding the drug pricing situation and tax reforms. Another deterrent could be high valuations with companies remaining wary of bidding wars leading to over-priced deals.

However, licensing deals should continue especially in orphan and rare disease areas as well as highly sought after therapeutic areas like immune-oncology.

Our Choices

Here is a look at four biotech stocks that delivered positive earnings surprises in the second quarter and are witnessing upward revisions in earnings estimates for 2017. All these companies are either Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) stocks.

Alexion Pharmaceuticals, Inc. (ALXN - Free Report) : New Haven, CT-based Alexion delivered a “beat and raise” quarter with flagship product, Soliris (eculizumab) continuing to perform well. Alexion is working on expanding Soliris’ label and has a key catalyst coming up with a decision from the FDA expected by Oct 23, 2017, regarding the approvability of Soliris for refractory generalized myasthenia gravis (gMG). Alexion got a boost this week with Soliris gaining EU approval for this indication making it the first and only complement-based therapy approved for an ultra-rare subset of gMG. The gMG indication represents incremental growth opportunity for Soliris.

Alexion, which had a rough 2016 with shares falling 35.9%, looks set to recover lost ground with shares increasing 9.1% so far in 2017, outperforming the 4.9% rally of the industry it belongs to. The efforts of the company’s new management team to turn things around are impressive. Alexion is redefining its R&D strategy with a focus on its key expertise areas. The company will continue to grow its rare diseases business which includes growing Soliris, Strensiq and Kanuma. To increase productivity, Alexion will focus its internal research efforts on its complement expertise and its development efforts on its core therapeutic areas of hematology, nephrology, neurology and metabolic disorders. The company has also decided to de-prioritize certain pipeline candidates and is discontinuing its preclinical programs with mRNA therapies as well as other preclinical programs that do not fall within the complement franchise. Alexion, a Zacks Rank #1 stock, has seen the Zacks Consensus Estimate for current-year earnings being revised 5.3% upward over the last 30 days.

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Regeneron Pharmaceuticals, Inc. (REGN - Free Report) : Tarrytown, NY-based Regeneron's key areas of focus include eye diseases, heart disease, allergic and inflammatory diseases, pain, cancer, infectious diseases and rare diseases. While eye drug, Eylea, the company’s key growth driver continues to perform well, Regeneron has been working on diversifying its portfolio and gained FDA approval for two drugs this year - Dupixent (moderate-to-severe atopic dermatitis) and Kevzara (moderately to severely active rheumatoid arthritis). Both drugs have blockbuster potential.

The company also has a strong pipeline and has an eventful second half of the year coming up with key mid-to-late stage pipeline catalysts lined up. Top-line phase III data on Dupixent for asthma are due later this quarter – positive data would allow the company to go ahead with a U.S. filing in the fourth quarter. Dupixent should also gain EU approval for the eczema indication in the third quarter. Regeneron is evaluating Dupixent in the pediatric atopic dermatitis setting. Another important data readout scheduled for the second half of the year is on the company’s PD-1 antibody REGN2810, for cutaneous squamous cell carcinoma (CSCC), the second most common skin cancer after basal cell carcinoma and the second deadliest skin cancer after melanoma. Positive data would allow the company to file for FDA approval in the first quarter of 2018.

Meanwhile, Eylea is being evaluated in combination with nesvacumab. Top-line data from two phase II studies - one in wet age-related macular degeneration and another in diabetic macular edema - are expected in the fourth quarter of the year.

Regeneron has seen the Zacks Consensus Estimate for current-year earnings being revised 15.2% upward over the last 30 days. Regeneron, a Zacks Rank #1 stock, has gained 27.9% year to date, substantially outperforming the 4.9% rally of the industry it belongs to. 

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Gilead Sciences, Inc. (GILD - Free Report) : Foster City, CA-based Gilead is well known for its presence in the hepatitis C virus (HCV) and HIV markets. Gilead topped estimates in the second quarter with its HCV business doing better than expected in the U.S. The company said that HCV patient starts in the first six months were better than originally expected. Moreover, the launch of an educational campaign in Oct 2016 to encourage testing of baby boomers has led to an 80% increase in HCV antibody screening by baby boomers, which in turn has led to an increase in diagnosis. The company’s HIV franchise also continues to do well and the company is progressing with its pipeline that includes treatments under evaluation for cancer, nonalcoholic steatohepatitis (NASH) and inflammatory diseases. Gilead raised its outlook for the year. Gilead has seen the Zacks Consensus Estimate for current-year earnings being revised almost 7% upward over the last 30 days. Gilead is a Zacks Rank #2 stock. 

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Ligand Pharmaceuticals Incorporated (LGND - Free Report) : San Diego, CA-based Ligand’s business model is based on developing or acquiring royalty revenue generating assets and coupling them with a lean corporate cost structure. The company is focused on the development and licensing of biopharmaceutical assets. Ligand’s Captisol formulation technology has allowed it to enter into several licensing deals and generate royalties. The company’s partners include big names like Amgen (AMGN - Free Report) and Novartis (NVS - Free Report) among others. Ligand also has licensing deals based on its OmniAb technology.

Ligand has seen the Zacks Consensus Estimate for current-year earnings being revised almost 10.4% upward over the last 30 days. Ligand, a Zacks Rank #1 stock, has gained 24.5% year to date, substantially outperforming the 4.9% rally of the industry it belongs to. 

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