Key Pharmaceutical Stocks Ready to Deliver Earnings Beats

The year 2014 bodes well for pharmaceutical companies as they leave the worst of the patent cliff behind and surge ahead on the back of restructuring activities and new products. The products launched in 2013 and forthcoming launches will help recover a part of the revenues lost to genericization. Many pharmaceutical companies have sold their non-core assets - this will drive their focus on its core business and support growth.

Several companies will continue in-licensing mid-to-late stage pipeline candidates to save on funds and time.

Although major patent expiries are over, drugs like Allergan’s (AGN) Restasis (May 2014) and Eli Lilly’s (LLY) Evista (Mar 2014) and Novartis’ (NVS) Sandostatin LAR (end of 2014) are slated to lose patent protection this year in U.S.

Though few companies will continue to face challenges, many others are likely to experience good results. In this light, it is a good idea to check out the potential of a handful of pharma stocks that could beat estimates this quarter. An earnings beat will reinforce investors’ confidence in these stocks, leading to rapid price appreciation.

The Way to Pick Right Stocks

Given the huge number of industry participants, pinpointing stocks that have the potential to beat estimates may appear to be a daunting task. One way to narrow down the list of choices during this earnings season is by looking at stocks that have the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Zacks Earnings ESP.

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.

Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

Below are three pharma stocks we believe are best positioned to stand out this earnings season.

Forest Laboratories Inc. (NYSE:FRX) is a Zacks Rank #2 (Buy) stock with an earnings ESP of +100%. The Zacks Consensus Estimate for the third quarter of fiscal 2014 is 4 cents.

Based in N.Y., Forest Labs’ main products include Namenda (Alzheimer's disease) and Bystolic (hypertension) among others. In order to bolster its pipeline, Forest Labs has been entering into licensing agreements with several companies.

The company has launched a number of new products over the past few quarters including Namenda XR and Fetzima (major depressive disorder). The company also raised its earning guidance for fiscal 2014 while reporting second quarter fiscal 2014 results.

Forest Labs is expected to report its third-quarter fiscal 2014 results before the opening bell on Jan 21.

Johnson & Johnson (NYSE:JNJ) is a Zacks Rank #3 (Hold) stock with an earnings ESP of +0.83%. The Zacks Consensus Estimate for the fourth quarter is $1.20.

Based in N.J., Johnson & Johnson is involved in the development, manufacturing and marketing of broad range of healthcare products. Johnson & Johnson’s main products include Remicade, Prezista, Zytiga and Procrit among others. New products like Xarelto, Zytiga and Invokana will drive growth further. The company upped its 2013 EPS guidance to $5.44 - $5.49.

Johnson & Johnson is expected to report fourth-quarter and full year 2013 results on Jan 21.

Ironwood Pharmaceuticals Inc. (NASD:IRWD) is a Zacks Rank #3 stock with an Earnings ESP of +2.00%. The Zacks Consensus Estimate for the fourth quarter is a loss of 50 cents.

This Cambridge-based company is focused on the development and commercialization of treatments addressing a variety of diseases including gastrointestinal diseases, central nervous system disorders, allergic conditions and cardiovascular disease. Ironwood Pharma’s sole marketed drug, Linzess, is approved for the treatment of patients suffering from irritable bowel syndrome with constipation (IBS-C) or chronic idiopathic constipation (:CIC).

Ironwood is looking towards cost control initiatives to help reduce the impact of the increasing Linzess marketing costs.

Ironwood is expected to report fourth-quarter 2013 results on Jan 21.

Bottom Line

In the last two quarters, all three companies discussed above have delivered positive earnings surprises. This nice short-term history of crushing expectations and a favorable Zacks Rank is an encouraging sign of a coming beat.

With the pharma industry holding solid growth potential, a sneak peek into the pharma space for some possible outperformers, backed by a favorable Zacks Rank and a positive Zacks Earnings ESP, could be a great way to profit this earnings season.

Read the analyst report on FRX

Read the analyst report on JNJ

Read the analyst report on IRWD


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