Pharma and biotech stocks started 2017 on a strong note with this part of the market remaining in favor as the year progresses. So far this year, the Nasdaq Biotechnology Index and the NYSE ARCA Pharmaceutical Index are up 25.6% and 14.6%, respectively.

With investors being more comfortable with the drug pricing scenario, focus has shifted to 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. The FDA is working to lower healthcare costs by speeding up the development of next-generation treatments, especially for rare diseases or targeted cancer therapies and is also working on clearing up a backlog of orphan drug applications.

The FDA has approved far more drugs this year than it did in the whole of 2016. Key approvals this year include Novartis’s (NVS - Free Report) Kymriah (the first gene therapy in the United States), Lilly’s Verzenio (advanced or metastatic breast cancer), Gilead’s (GILD - Free Report) Vosevi (hepatitis C virus), Puma’s Nerlynx (to reduce the risk of breast cancer returning), J&J’s Tremfya (moderate-to-severe plaque psoriasis), Regeneron/Sanofi’s Kevzara (rheumatoid arthritis), Roche’s multiple sclerosis treatment, Ocrevus, Regeneron and Sanofi’s eczema treatment, Dupixent, Tesaro’s PARP inhibitor, Zejula, and BioMarin’s Brineura (treatment of a specific form of Batten disease) among others. Quite a few of these drugs have blockbuster potential.

Meanwhile, some other factors that should continue having a positive impact on pharma and biotech stocks are new product sales ramp up, R&D success and innovation, strong results, a higher number of FDA approvals and continued strong performance from legacy products.

5 Drug Stocks to Keep an Eye on This Earnings Season

Pfizer Inc. (PFE - Free Report) : Pfizer is focused on the development and commercialization of a wide range of medicines and vaccines as well consumer health care products. The company has surpassed earnings expectations in each of the first two quarters of 2017. Key revenue drivers include Ibrance, Eliquis and Xeljanz. Pfizer, which expects 2017 revenues to be affected by about $2.5 billion due to loss of exclusivities (LOEs), is working on bringing new products to market to make up for lost sales. The company has 15 potential blockbusters lined up for the next 5 years with about half of these potentially by 2020. Focus also remains on growing new products like Ibrance, Eliquis and Xeljanz. Meanwhile, the impact of LOEs should continue declining in the coming years (about $2 billion in 2018 as well as 2019, $1 billion - $2 billion in 2020; $1 billion in 2021, and $0.5 billion or less from 2022 to 2025).

Pfizer, a Zacks Rank #2 stock, carries a VGM Score of B. The VGM Score is a useful tool that allows investors to gain an insight into a stock’s strengths and weaknesses.

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.

This company, which will be reporting third quarter results on October 31, has an earnings ESP of +0.84%.

Eli Lilly and Company (LLY - Free Report) : Lilly, which has a strong presence in the pharmaceuticals as well as animal health segments, is slated to report third quarter 2017 results on October 24. This Zacks Rank #3 stock has an earnings ESP of +4.46% for the third quarter. Lilly surpassed earnings expectations in the first two quarters of 2017. Although the company is facing challenges including generic competition, new products should drive results. Lilly has several important pipeline catalysts lined up for the coming quarters as well. Estimated earnings growth for the current year is 17.9%.

Lilly has gained 18.4% year to date, compared to the 18% rally of the industry it belongs to.

Vertex Pharmaceuticals (VRTX - Free Report) : Vertex, a key player in the cystic fibrosis (CF) market, surpassed earnings expectations in three of the last four quarters with an average surprise of 17.9%. The company holds a strong position in the CF market with two products, Orkambi and Kalydeco, in its portfolio. Early in August, Vertex had said that it expects its CF franchise to deliver revenues of $1.87 billion - $2.1 billion in 2017 including Orkambi revenues of $1.1 billion - $1.3 billion.

The company is working on expanding its CF portfolio and is currently seeking both FDA and EMA approval for a tezacaftor/ivacaftor combination. With the FDA granting priority review, a response should be out by Feb 28, 2018.

Vertex, a Zacks Rank #1 stock, has gained 111.1% year to date, substantially outperforming the 13.9% rally of the industry it belongs to. The company, which is expected to report third quarter results on October 24, has an Earnings ESP of +2.56% for the quarter.

Biogen Inc. (BIIB - Free Report) : Biogen is a key name in the multiple sclerosis (“MS”) market with several approved products like Tecfidera, Tysabri and Avonex in its portfolio. The company also has a spinal muscular atrophy product (Spinraza) in its portfolio and is working on developing treatments for diseases like Alzheimer’s, Parkinson’s and amyotrophic lateral sclerosis.

Biogen’s earnings track record is good with the company surpassing earnings expectations in each of the last four quarters with an average surprise of 6.4%. The company, which is scheduled to report third quarter results on October 24, has an Earnings ESP of +0.32%. Over the last 7 days, the stock has seen the Zacks Consensus Estimate for third quarter and current-year earnings being revised 0.5% and 0.2%, respectively.

Biogen, a Zacks Rank #3 stock, has gained 16% year to date, outperforming the 13.9% rally of the industry it belongs to.

Merck (MRK - Free Report) : Merck, a Zacks Rank #3 stock, has consistently surpassed earnings expectations over the last four quarters with an average surprise of 8.1%. The company will be reporting Q3 earnings on October 27 - earnings ESP for Q3 is +0.28%. 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 like Keytruda and the strong performance of the base business should provide support. Merck also has a deep pipeline which bodes well for long-term growth.

Today's Stocks from Zacks' Hottest Strategies

It's hard to believe, even for us at Zacks. But while the market gained +18.8% from 2016 - Q1 2017, our top stock-picking screens have returned +157.0%, +128.0%, +97.8%, +94.7%, and +90.2% respectively.