Drug stocks have bounced back this year with the Nasdaq Biotechnology Index and the NYSE ARCA Pharmaceutical Index gaining 18.6% and 10.8%, respectively, year-to-date (YTD).
 

There are several reasons for this improved performance. Investors are now more comfortable with the drug pricing scenario and are willing to look at the fundamentals of the sector. Although the drug pricing issue will remain a headwind, expectations are that steps taken by the Trump administration to drive down drug prices will not be as draconian as previously expected.  

Deregulation and increased competition seem to be some of the ways that will be used to control drug prices. FDA Commissioner Scott Gottlieb recently said that the agency is working on a plan to lower healthcare costs by speeding up the development of next-generation treatments, especially for rare diseases or targeted cancer therapies. The FDA is also working on clearing up a backlog of orphan drug applications. YTD, the FDA has approved 23 new drugs surpassing last year’s total of 22.

Other factors like ramp up in new product sales, R&D success and innovation, strong results, a higher number of FDA approvals and continued strong performance from legacy products should contribute to a sustained recovery in the sector.

Tax reforms and cash repatriation would boost performance as well.

Given this scenario and with healthcare sector earnings round the corner, it would make sense to look at some pharma and biotech stocks that are expected to report a positive earnings surprise in the quarter.

Investing in such stocks could prove beneficial for investors as an earnings beat usually leads to significant share price appreciation.

5 Drug Stocks to Watch Out for This Earnings Season

With the help of the Zacks Stock Screener, we have zeroed-in on five pharma and biotech stocks that sport a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) and have a positive Earnings ESP. Earnings ESP is a very valuable tool for investors looking for stocks that are most likely to beat earnings estimates. Moreover, adding a Zacks Rank of #1, 2 or 3 has produced a positive surprise 70% of the time. 

Merck & Co., Inc. (MRK – Free Report) : Kenilworth, NJ-based Merck is known for its strong presence in the pharmaceuticals and vaccines market. The company also has a presence in the animal health segment. Some of the better known products in Merck’s portfolio include Keytruda, Gardasil, Januvia/Janumet, Isentress, Vytorin/Zetia and Remicade among others. Merck, a Zacks Rank #2 stock, has consistently surpassed earnings expectations over the last four quarters with an average surprise of 4.36%. The company is expected to report Q2 earnings on Jul 28 — earnings ESP for Q2 is 1.15%. Although the company does have challenges in the form of generic competition as well as safety issues related to some studies being conducted with Keytruda, new products and the strong performance of the base business should provide support. Merck also has a deep pipeline which bodes well for long-term growth.