Pharmaceutical and biotech stocks have handsomely outperformed markets this year, and with Johnson & Johnson's second-quarter earnings beat, investors may hope earnings will push stocks even higher.
However, the actual results for many large-cap pharma companies—such as Novartis, Pfizer, Merck and Eli Lilly—are unlikely to inspire as they wade through the tail end of patent cliffs, and fight against currency headwinds. As a result, news on the pipelines will be where investors will focus their attention.
That said, we do believe that earnings per share will be at least on target with expectations, and predict that AbbVie will exceed Wall Street forecasts on strong sales of its flagship brand Humira.
Certainly the evidence points to a recovery in pharmaceutical pipelines, which is a point we have been making for 18 months. What's more, marketing budgets are now expanding after shrinking for years in the thick of restructuring and consolidation.
Drugs stocks are now more than just bond-proxies, trading on the basis of their generous yields, and improved capital allocation—although these are still, and certainly have been, part of their appeal.
Investors will be peppering managements for commentary on the next class of drug launches, with particular emphasis on the immunotherapies such as PD-1s for treating cancer from Bristol-Myers Squibb and Merck, and hepatitis C agents from AbbVie, Bristol and Merck.
Two new drugs for multiple myeloma, Celgene's Pomalyst, and Onyx's Kyprolis, are expected to complement strong results for both companies, while Biogen's new oral multiple sclerosis pill, Tecfidera, is surging out of the gate.
Life sciences companies continue to rise above the recent "ratescare," with new drug pipelines, and active merger-and-acquisition activity serving as rocket fuel to the biotech sector.
Evidence abounds that innovation is alive and well. This was underscored by the important clinical data presented at the American Society of Clinical Oncology (ASCO), the International Liver Congress (EASL) and the American Diabetes Association (ADA) conferences as well as by Amgen's hostile bid for Onyx, recent rumors of a possible bid for Alexion by Roche and a round of successful life sciences initial public offerings.
In fact, 16 biotech companies have gone public this year, including Bluebird, Prosensa and Epizyme, and the market has given them a warm welcome with an average price gain for the entire group of a whopping 48 percent so far this year.
And it seems that when it rains, it pours, now even a friendly Food and Drug Administration has approved 39 new drugs in 2012—a level not seen since 1997—and has given 28 drugs breakthrough status designations this year. This means investors enthusiastically await another bumper crop of new drug launches over the next 18 months.
Oh, and what about M&A in the second half of the year? Investors will have their eyes and ears peeled for hints on future deal prospects, who else will step up for Onyx? How high will AMGN go to win control? Will there be bids for other new drug hopefuls such as Alexion, Alnylam, BioMarin and Regeneron?
Stay tuned for an interesting earnings season.
Barbara Ryan is a managing director in the FTI Consulting strategic communications consulting practice and a CNBC contributor. She has more than 31 years of Wall Street experience as a sell-side research analyst covering the pharmaceutical industry. She has worked at Bear Stearns, Prudential, Alex Brown and Deutsche Bank. In 2012, Ryan founded Barbara Ryan Advisors, a pharmaceutical consulting firm providing services to pharma companies, investment banks and institutional investors. Ryan is widely recognized as an authority on the trends and outlook for the global pharmaceutical industry and has been publishing her analysis throughout her career.