The drug industry witnessed major policy changes during Joe Biden's four-year term as U.S. President, including the historic Inflation Reduction Act (“IRA”). With Donald Trump’s reelection, the biotech industry hopes to witness more innovation and mergers and acquisitions (M&A) activity. Efforts to repeal the IRA look likely. However, it all depends on who is appointed to key roles at federal health agencies. Drug pricing reforms are expected to remain a key priority for the new government. Trump, in his previous term, had put stress on control of drug prices, though it was not highlighted in his election campaign this time around. Regular pipeline setbacks, slow ramp-up of newer drugs, Federal Trade Commission’s (FTC) scrutiny of M&A deals and broader macroeconomic uncertainty are some of the other headwinds for the sector.
Nonetheless, the Zacks Medical-Drugs industry is showing promising trends in 2024 amid increased M&A and positive pipeline news. Innovation is at its peak for the industry, with key spaces like diabetes/obesity, inflammation and neuroscience attracting attention. Investors are particularly interested in developments related to GLP-1 receptor agonists, radiopharmaceuticals and antibody-drug conjugates (ADCs).
These positive factors should keep driving stocks like Madrigal Pharmaceuticals MDGL, Corcept Therapeutics CORT, Catalyst Pharmaceuticals CPRX, Larimar Therapeutics LRMR and Theravance Biopharma TBPH.
Industry Description
The Zacks Medical-Drugs industry comprises small and some medium-sized drug companies that make medicines for both human and veterinary use. We have a separate industry outlook discussion on big drugmakers. Small drugmakers have a limited portfolio of marketed drugs or no commercial-stage drugs at all. Some drugmakers are dependent on just one marketed drug or pipeline candidate. For such companies, upfront or milestone payments from collaboration partners — in most cases, their larger counterparts — are the main sources of revenues. These companies need ample free cash flow to fund their R&D activities.
Factors Shaping the Future of the Medical-Drugs Industry
Pipeline Success: The success or failure of key pipeline candidates in clinical studies can significantly drive the stock price of industry players. Successful innovation and product line extensions in important therapeutic areas and strong clinical study results may act as important catalysts for the stocks.
Strong Collaboration Partners: These companies regularly seek external partners and collaborators for complementary strengths. A partnership deal with a popular drugmaker is a good sign about the potential of small pharma companies, especially when an equity investment is included in the deal. M&A deals are in full swing in the sector, signaling growth.
Investment in Technology for Innovation: For these smaller companies, succeeding in a shifting global market and an evolving healthcare landscape requires adopting innovative business models, investing in new technologies and increasing investments in personalized medicines. Over the past few years, scientific and technological advancements have made it possible to develop personalized therapies. Other than that, adoption and information exchange through the meaningful use of health IT, development of therapies that improve overall patient outcomes and investment in developing and emerging markets are some of the key priorities for drug companies. Artificial intelligence and machine learning techniques are being used for the rapid advancement of drug discovery and target identification processes.
Pipeline Setbacks: The smaller companies have their share of risk in the form of unstable cash flows. Also, the failure of key pipeline candidates in pivotal studies and regulatory and pipeline delays can be huge setbacks for these smaller companies and significantly hurt their share prices.
Zacks Industry Rank Indicates Bright Prospects
The group’s Zacks Industry Rank is basically the average of the Zacks Rank of all the member stocks.
The Zacks Medical-Drugs industry currently carries a Zacks Industry Rank #75, which places it in the top 30% of 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present you with a few top-ranked stocks to capitalize on the thriving prospects of the small and medium-sized drugmakers’ space, let’s take a look at the industry’s recent stock-market performance and the valuation picture.
Industry Lags S&P 500 and Sector
The Zacks Medical-Drugs industry is a huge 171-stock group within the broader Medical sector. The industry has underperformed the S&P 500 as well as the Zacks Medical sector so far this year.
Stocks in this industry have collectively declined 3.4% year to date against the Zacks S&P 500 composite’s rise of 24.7% and the Zacks Medical sector’s increase of 2.1%.
YTD Price Performance
Industry's Current Valuation
Based on the trailing 12 months price-to-sales ratio (P/S TTM), which is a commonly used multiple for valuing these small drugmakers, the industry is currently trading at 2.24, compared with the S&P 500’s 6.19 and the Zacks Medical sector's 3.44.
Over the last five years, the industry has traded as high as 4.21X, as low as 1.74X and at the median of 2.33X, as the chart below shows.
Trailing 12-Month Price-to-Sales (P/S) Ratio
5 Drug Stocks to Bet On
Corcept Therapeutics: Redwood City, CA-based Corcept’s sole marketed drug, Korlym, which is approved for treating Cushing's syndrome, has been performing well. Corcept increased its annual revenue guidance for Korlym on the third-quarter conference call owing to strong demand. Corcept has discovered a large portfolio of proprietary compounds, including relacorilant, dazucorilant, exicorilant and miricorilant, which selectively modulate the effects of cortisol but not progesterone. A new drug application for its lead pipeline candidate, relacorilant, for Cushing’s syndrome is expected to be submitted in the fourth quarter of 2024.
The stock of Corcept Therapeutics has risen 67.2% so far this year. The consensus estimate for 2024 earnings has risen from $1.12 to $1.31 per share over the past 30 days. The company has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. .
Price and Consensus: CORT
Madrigal Pharmaceuticals: Based in West Conshohocken, PA, Madrigal Pharmaceuticals’ drug Rezdiffra was approved in March and became the first and only therapy approved by the FDA for the treatment of adult patients with noncirrhotic NASH with moderate-to-advanced liver fibrosis. The drug’s commercial launch is off to a strong start, driven by early patient demand, growing adoption by prescribers and broader payer coverage. The drug has generated around $77 million in sales so far since launch in April, which is better than management’s expectations. A regulatory application seeking the approval of Rezdiffra is also under review in the EU. A final decision is expected in mid-2025. Several late-stage studies are ongoing, evaluating the expanded use of Rezdiffra for NASH, including one for compensated NASH/MASH cirrhosis.
Madrigal’s stock is up 53.4% so far this year. Loss estimates for 2024 have improved from $29.49 per share to $24.08 per share over the past 30 days. The company has a Zacks Rank #2 (Buy).
Price and Consensus: MDGL
Catalyst Pharmaceuticals: Coral Gables, FL-based Catalyst Pharmaceuticals’ lead drug is Firdapse, which is approved for treating Lambert-Eaton Myasthenic Syndrome (LEMS), an ultra-rare disease. The drug has been witnessing strong demand amid increasing prescription rates and new patient starts. In 2023, CPRX acquired the U.S. rights for Fycompa (perampanel) CIII from Eisai, which diversified the company’s portfolio by adding a commercial-stage epilepsy asset. Agamree, its newest acquired muscle disorder drug, was launched in the U.S. market in the first quarter of 2024. With Agamree’s approval and launch, Catalyst has further diversified its commercial portfolio. On its third-quarter conference call this week, Catalyst raised its total revenue guidance.
The stock of Catalyst Pharmaceuticals has risen 38.3% so far this year. The consensus estimate for 2024 earnings is stable at $1.92 per share over the past 30 days. The company has a Zacks Rank #2.
Price and Consensus: CPRX
Theravance Biopharma: Cayman Islands-based Theravance Biopharma generates revenues in the United States from its collaboration with Viatris related to the sales of Yupelri, a nebulized therapy for chronic obstructive pulmonary disease. The product has been witnessing a strong sales uptake owing to increased customer demand, resulting in increased collaboration revenues for Theravance. The company’s ongoing restructuring initiatives are saving costs. Theravance is currently focusing on developing its pipeline candidate, ampreloxetine, a norepinephrine reuptake inhibitor for the treatment of symptomatic neurogenic orthostatic hypotension in patients with multiple system atrophy in the phase III CYPRESS study.
The stock of Theravance Biopharma has declined 22.1% so far this year. The consensus estimate for 2024 loss has remained stable at 45 cents share over the past 30 days. The company has a Zacks Rank #2.
Price and Consensus: TBPH
Larimar Therapeutics: CA-based Larimar Therapeutics is a clinical-stage company making medicines for rare diseases. Its lead pipeline candidate is nomlabofusp (CTI-1601), being developed as a potential treatment for Friedreich's ataxia (FA). In May, the FDA removed the partial clinical hold on nomlabofusp program following a review of the phase II dose exploration study data. The company will provide an update from the nomlabofusp development program in mid-December 2024 that will include available safety, pharmacokinetic and frataxin data from an ongoing open label extension study. This should be an important catalyst for the stock.
Larimar Therapeutics plans to file a biologics license application seeking approval of nomlabofusp for FA in the second half of 2025. The company believes that nomlabofusp has the potential to be the first frataxin protein replacement therapy for patients with FA.
The stock of Larimar Therapeutics has risen 100.5% in the past year. The consensus estimate for 2024 loss has narrowed from $1.39 per share to $1.16 per share over the past 30 days. The company has a Zacks Rank #2.
Price and Consensus: LRMR
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