Healthcare Growth Trend: 3 Medical Stocks to Buy

This article was originally published by Zacks.com.

The 2014 Q2 earnings season has been impressive for the medical sector, which reported 16.1% year-over-year earnings growth on 12.5% increase in revenues. Also, among the 94% sector participants reported so far, 78.7% delivered positive earnings surprises.

Favorable industry trends in pharmaceutical and biotechnology primarily contributed to this robust growth.

Impressive growth trends in pharma and biotech

Pharmaceutical companies have been affected by genericization over the past few years. However, the worst of the patent cliff is over and several companies are now on the recovery path.

Johnson & Johnson (JNJ) was the first major company from the drug manufacturing industry to post impressive second-quarter earnings. Other major drug manufacturers such as Pfizer Inc. (PFE) and Merck & Co. Inc. (MRK) also reported upbeat results.

Earnings growth in biotech firms Gilead Sciences Inc. (GILD) and Amgen Inc. (AMGN) became a yardstick for other stocks in the same segment.

The NYSE ARCA Pharmaceutical Index is up almost 20.1% in the last year. So far in 2014, the index increased 10%. As of Aug. 11, the Standard & Poor’s biotech index soared 13.6% since January, compared to the S&P 500’s gain of 5.1%.

The space witnessed a slew of IPOs in the last few quarters. Fifty-three pharma and biotech firms launched IPOs this year. The segment also witnessed a flurry of new deals in recent months. All of this boosted investors’ sentiment and pushed stock prices up.

New drugs and increased spending boost growth

Development of new drugs and an increase in healthcare spending also fueled growth of pharma and biotech stocks.

Throughout the first half of 2014, several important products gained approval by the Food and Drug Administration (FDA). Shares of Achillion Pharmaceuticals, Inc. (ACHN) had skyrocketed (gained 83.3%) after the FDA lifted the clinical hold on Achillion’s lead drug sovaprevir. Merck also benefitted immensely after the US health regulator approved the drug vorapaxar.

A number of new drugs are also in the pipeline. Many companies have already announced FDA acceptance for filing of New Drug Application.

Amid all these, the Ebola outbreak is also making headlines. This has brought some biotech companies, such as Tekmira Pharmaceuticals Corp (TKMR), into the spotlight for experimental Ebola disease treatments.

Meanwhile, Americans are currently in a better position to meet medical costs thanks to the rebound in the US economy. This recovery has propelled healthcare spending. According to PricewaterhouseCoopers’s Health Research Institute, healthcare spending is expected to rise 6.8% in 2015, up from 6.5% increase forecasted for this year.

In addition, the Affordable Care Act and an aging population both also contributed significantly to increased healthcare spending. Most baby boomers are expected to turn 65 between 2012 and 2030, and the US Census Bureau stated the nation’s 65-and-older population is anticipated to reach 83.7 million by 2050.

Banking on these encouraging factors, along with ever-increasing demand in emerging markets, drug manufacturing and biotech companies are poised to grow in the coming quarters.

3 medical stocks to buy now

1. Gilead Sciences Inc.

A biopharmaceutical company that develops and commercializes medicines for treatment of life threatening diseases, Gilead Sciences posted second-quarter earnings per share of $2.32, surpassing the Zacks Consensus Estimate of $1.61. Moreover, the Zacks Consensus Estimate for the company’s current year earnings increased 18.4% to $7.26 per share in the 30 days ago.

Last Friday, Gilead won a dispute with Roche related to rights of its hepatitis C drug, Sovaldi. Shares of Gilead rose sharply and touched a new high of $99.49. It's good news for Gilead since IMS Health revealed that prescriptions for Sovaldi amount to more than all other hepatitis C treatments combined.

This strong buy stock has an attractive price/earnings to growth (PEG) ratio of 0.46. In the last 3 months, the stock gained 23.4%.

2. Allergan Inc. (AGN)

Multi-specialty healthcare company Allergan reported second quarter 2014 earnings of $1.51 per share, above the Zacks Consensus Estimate of $1.44. Earnings also climbed 23.8% from the same quarter a year ago.

The company expects third-quarter earnings in the range of $1.44 to $1.47 per share. The Zacks Consensus Estimate currently stands at $1.44. The company also expects 2014 earnings to increase $5.74 to $5.80 per share, well above the Zacks Consensus Estimate of $5.70 per share.

Expected earnings growth rate for this strong buy stock is 21.4% for this year, much above the industry growth rate of 0.5%.

3. Supernus Pharmaceuticals, Inc. (SUPN)

This specialty pharmaceutical company focuses on the development and commercialization of products for the treatment of central nervous system diseases in the US.

Supernus posted second-quarter 2014 earnings per share of $0.06, which compared favorably with the Zacks Consensus Estimate of a loss of $0.18 cents and the year-ago loss of $0.57 cents. Revenues were $29.7 million, up 10.5% from the same quarter a year ago. Revenues were well above the Zacks Consensus Estimate of $19 million.

Supernus has raised its annual revenue guidance to $105 million (previous guidance: $75 million to $85 million).

Expected earnings growth rate for this buy stock is 100.7% for 2014, significantly higher than the industry growth rate of 24.3%.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Neither Zacks Investment Research, Inc., Physician’s Money Digest nor the information providers have any liability, contingent or otherwise for the accuracy, completeness, timeliness or correct sequencing of the information or for any decision made or action taken by you in reliance upon the information or “Zacks.com” or “PhysiciansMoneyDigest.com” or for interruption of any data, information or any other aspect of “Zacks.com” or “PhysciansMoneyDigest.com.” The past performance of a mutual fund, stock or investment strategy cannot guarantee its future performance.