Zacks: 3 Drug Stocks To Avoid For Now

The performance of the drug industry in first-quarter 2018 has been an encouraging one with quite a few companies' beatings both earnings as well as revenue estimates.

The overall investor sentiment toward pharma and biotech stocks has improved of late as investors are focusing more on fundamentals than on issues like drug pricing. While drug pricing will continue to pose as a major deterrent, thanks to the government increased emphasis on making drugs affordable, new drug approvals and label expansion of existing drugs should help companies maintain the momentum in 2018. 

The year 2017 saw a number of drugs like Rhopressa, Tymlos, Ozempic, Vyzulta, Siliq, Trulance, Hemlibra, among others getting approval.  Lutathera, Ilumya, Symdeko, Biktarvy, Erleada have already been approved in 2018 and investors are expected to keep their focus on the same.

Mergers and acquisitions remain another key area of investor focus. While 2017 was pretty ho-hum on this front with just a few key deals, 2018 is expected to see a surge in M&A primarily due to lower U.S. tax rates.

While strong pipelines, innovative treatments, impressive results, growing demand for drugs especially for rare-to-treat diseases, an aging population and increased health care spending should support growth in this sector, caution is to be exercised when picking stocks for investing.

Here are a few sell-rated stocks which should be strictly avoided for now:

Valeant Pharmaceuticals International, Inc. VRX:  Canada-based specialty pharma company, Valeant, has been in troubled waters for quite some time now. Valeant's guidance for 2018 was disappointing. After a tumultuous period, Valeant started a rebuilding process with its CEO, Joseph C. Papa.  The company has reduced total debt by approximately $6.7 billion since the end of first-quarter 2016. However, the dermatology business remains challenging and is expected to decline in 2018 as compared to 2017.  Quite a few of its drugs are facing generic competition. Hence, it might be a while before the company turn arounds as management had projected.

Endo International plc ENDP: Ireland-based Endo is a global specialty pharmaceutical company focused on generic and branded pharmaceuticals. Endo's guidance for 2018 was way below expectations. The generics business is under tremendous pressure due to the loss of marketing exclusivity for the first-to-file products ezetimibe tablets and quetiapine ER tablets in the first half of 2017. The branded pharmaceuticals business was impacted by continued generic competition for established products, product divestitures and ceasing shipments of Opana ER and this is expected to continue further. Endo withdrew opioid pain medication Opana ER (oxymorphone hydrochloride extended release) from the market following FDA's request in June 2017.  The company divested its non-core assets such as Belbuca and restructured its pain franchise to focus particularly on specialty branded business.

Aerie Pharmaceuticals, Inc. AERI: Irvine, CA-based Aerie Pharmaceuticals focuses on the development and commercialization of eye disease therapies, including glaucoma and other eye-diseases. Aerie received a significant boost with the recent approval of lead drug Rhopressa for the lowering of elevated intraocular pressure in patients with open-angle glaucoma or ocular hypertension.  However, Rhopressa faces stiff competition from established branded and generic pharmaceutical companies, such as Novartis' Simbrinza and Travtan, and Allergan's Lumigan, as well as other smaller biotechnology and pharmaceutical companies. Valeant's Vyzulta was recently approved for open-angle glaucoma or ocular hypertension. Rhopressa will face a tough time in gaining market share due to competition from these products.

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