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Forget Bayer, Buy These 3 Drug Stocks Instead

Zacks

Life science company, Bayer AG BAYRY, reported a mixed second quarter with earnings surpassing expectations but sales falling short. While the Pharmaceuticals, Animal Health and Covestro segments recorded a year-over-year increase in sales, the Crop Science and Consumer Health divisions recorded a decline.

The Crop Science business was hit by high channel inventories in Brazil, the world’s second-largest agriculture market, while a difficult environment in the U.S. market weighed on the performance of the Consumer Health segment. Given the performance of these two segments, the company now expects 2017 sales of more than €49 billion instead of sales of about €51 billion.

Core earnings per share from continuing operations are now expected to grow by a low- to mid-single-digit percentage (old guidance: mid- to high-single-digit percentage).

The Life Science businesses are expected to generate sales of €35 billion – €36 billion (previously: approximately €37 billion). The company lowered its outlook for the Consumer Health and Crop Science segments. The second half of the year is expected to be weak for the Consumer Health business with sales expected in the range of €6 billion (previously: more than €6 billion).

The Crop Science business is now expected to generate sales of less than €10 billion (previously: sales of more than €10 billion).

Given the lowered outlook, Bayer has been witnessing downward revisions in earnings estimates for both 2017 and 2018 over the last 30 days. While 2017 estimates are down 2.6%, 2018 estimates have declined 1.6%.

While Bayer, a Zacks Rank #4 (Sell) stock, sorts through the headwinds being faced by the Crop Science and Consumer Health segments, we advise investors to focus on drug stocks with a strong Zacks Rank — #1 (Strong Buy) or #2 (Buy).

Our Picks

Alexion Pharmaceuticals, Inc. ALXN: New Haven, CT-based Alexion reported a strong second quarter with both earnings and revenues topping expectations. The company also raised its revenue and earnings outlook for the year. Flagship product, Soliris (eculizumab) continued 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). A decision in the EU, where a positive CHMP opinion was received, is also expected in the third quarter.

Alexion, which had a tough 2016 with shares falling 35.9%, looks set to recover lost ground with shares increasing 13.1% so far in 2017, outperforming the 9.7% rally of the industry it belongs to. The new management team laid out its strategic roadmap and said that its R&D efforts will be focused on its expertise area of complement biology and core therapeutic areas of hematology, nephrology, neurology, and metabolic disorders. Alexion will be working on growing its rare disease business. A Zacks Rank #1 stock, Alexion is witnessing upward revisions in earnings estimates for 2017 and 2018 over the last 30 days. Estimated earnings growth for the current year is 26.1%.

Sanofi SNY: French pharma giant Sanofi raised its 2017 earnings outlook (at constant exchange rates – CER) following the release of second quarter results. Sanofi has a strong presence in several markets including diabetes, cardiovascular, rare disorders, vaccines and consumer healthcare. The company, which had recorded a decline in share price last year, has gained 18.6% year to date, outperforming the 10.4% rally of the industry it belongs to. Earnings estimates for 2017 are up 2.2% over the last 7 days. Although the company’s diabetes segment will remain under pressure, Sanofi could well be poised for a turnaround on the back of new product approvals and sales ramp up of recently launched products.

Sanofi is a Zacks Rank #2 stock. The company also has a VGM style score of “B”. The VGM style score is a useful tool that allows investors to gain an insight into a stock’s strengths and weaknesses.

While “V” stands for Value, “G” stands for Growth and “M” for Momentum — the score is a weighted combination of these three metrics. Our research shows that stocks with a VGM Score of “A” or “B” when combined with a Zacks Rank #1 or #2 offer the best upside potential. You can see the complete list of today’s Zacks #1 Rank stocks here.

Gilead Sciences, Inc. GILD: Biotech major Gilead also makes it to our list. Gilead, which has been under pressure mainly due to the performance of its hepatitis C virus (HCV) franchise, reported a strong second quarter with the HCV business doing better than expected in the U.S. Gilead’s HIV franchise also continues to do well. The company surpassed earnings and revenue estimates and raised its 2017 outlook as well. Earnings estimates for 2017 and 2018 are up over the last 30 days. Gilead is a Zacks Rank #2 stock with a VGM style score of "B".

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