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3 Healthcare Stocks With Rising Expectations

By Cory Renauer - Jul 29, 2019 at 9:27AM

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It looks like 2019's going to be much better than expected for these giants operating in different corners of the healthcare sector.

Healthcare investors who began 2019 with fear and trepidation can rest a little easier thanks to second-quarter earnings reports from GlaxoSmithKline ( GSK 0.24% )Johnson & Johnson ( JNJ -0.63% ), and Thermo Fisher Scientific ( TMO 0.23% ). All three healthcare giants began the year with less-than-enthusiastic forward outlooks that they keep revising upward. 

Can these businesses keep their trains rolling uphill? Let's look at the sources of optimism to find out. 

Three healthcare professionals standing together and holding their thumbs up.

Image source: Getty Images.

Thermo Fisher Scientific: Now serving viral vectors

Rising demand for gene-sequencing services has helped push Thermo Fisher Scientific's bottom line 110% higher over the past five years, and the company's still adding ancillary services useful to just about anyone that needs to measure something really small. The company remains a market-leading provider of machines that identify the chemical identity of residue samples scraped from crime scenes plus heaps of applications with fewer thrills but better cash flows.

Thermo Fisher's latest effort to stay ahead of the curve led the company to acquire a leading viral vector contract development and manufacturing organization (CDMO) for $1.7 billion in cash earlier this year. Strands of DNA won't survive in the bloodstream for a minute without a delivery vehicle for protection, and non-replicating viruses always get the job.

Every organization that knows what to do with a custom viral vector also has some relationship with Thermo Fisher already. A new revenue stream from gene therapy developers looking for a place to put their DNA and continued growth across all reporting segments inspired management to raise its outlook for 2019. Now the company thinks total revenue could reach $25.5 billion at the high end of its guided range, which isn't much higher than the company expected this January. Closer to the bottom line, though, the company thinks adjusted earnings could rise as high as $12.26 per share or 10% more than last year. 

Laboratory work.

Image source: Getty Images.

Johnson & Johnson: Surprise performances

Johnson & Johnson began 2019 with a grim outlook in response to a loss of exclusivity for its top-selling product, Remicade and some of the same pricing pressures that are troubling many of its peers. In January, J&J predicted annual sales, excluding currency fluctuations, would rise by 0.5% at the middle of its guided range while adjusted earnings per share would rise just 4.9% this year. Now, the company expects a 1.5% sales increase and a 7.3% gain on the bottom line. 

In the first half of 2019, sales of J&J's anti-inflammatory injection, Remicade, fell 19% year over year to $2.2 billion. The $500 million hole that biosimilar competition poked through the company's income statement was entirely filled by Stelara sales, which jumped 23% to $3.0 billion over the same time frame.

Tremfya, a psoriasis injection that entered a crowded market in late 2017, is finally starting to take flight thanks to a new and improved auto-injector. In the first half of 2019, Tremfya sales jumped 128% to $452 million.

Immunology isn't the only pharmaceutical area with drug launches exceeding expectations several years after their initial launches. Year-over-year sales of J&J's leukemia tablet, Imbruvica, jumped 34% to $1.6 billion in the first half, and multiple myeloma treatment Darzalex jumped 49% to $1.4 billion.

Doctor with gloved hands holding a light bulb.

Image source: Getty Images.

GlaxoSmithKline: Not as bad as feared

GlaxoSmithKline CEO Emma Walmsley has some pretty small shoes to fill. Her predecessor, Sir Andrew Witty, sold the company's oncology assets to Novartis in 2016 in order to support an asthma pipeline that hasn't lived up to expectations. Although there are recent signs of improvement, top-line sales are lower now than they were a decade ago.

Earlier this year, Glaxo was expecting adjusted earnings per share to fall by 7% at the midpoint of if its guided range. Thanks to strong vaccines sales, the company recently improved its outlook to an expected 4% slide in 2019 partly caused by generic competition for Advair.

Walmsley has shown that she's not afraid to invest money that the company really can't afford to lose while rebuilding the oncology operation that Witty sold off. Earlier this year, Glaxo splashed out with a $5.1 billion acquisition of Tesaro to gain rights to Zejula, an ovarian cancer drug that has failed to gain traction among patients who have already relapsed.

Second-quarter Zejula sales climbed slightly year over year to reach an annualized $282 million, but the drug could help Glaxo report much stronger sales around this time next year. The company recently reported positive results from the pivotal Prima study with Zejula as a first-line maintenance treatment, although we'll have to wait for an upcoming scientific conference to learn any more details.

That was a close one

A potential rebate rule that would have ended the safe-harbor protection that allows the pharmacy benefits management industry to ignore anti-racketeering laws led to some head-scratching earlier this year. While the biopharma industry was cheering for an end to rebate negotiations, sadly, it isn't going to happen.

Now that the drug pricing status quo is no longer in immediate danger, big pharma sales will probably become even more unpredictable. Luckily for Thermo Fisher, negotiations with its customers are a lot more straightforward.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Johnson & Johnson Stock Quote
Johnson & Johnson
JNJ
$157.09 (-0.63%) $0.99
GlaxoSmithKline plc Stock Quote
GlaxoSmithKline plc
GSK
$41.47 (0.24%) $0.10
Thermo Fisher Scientific Inc. Stock Quote
Thermo Fisher Scientific Inc.
TMO
$627.58 (0.23%) $1.43

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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