After being battered by the drug pricing controversy in 2016, the pharma/biotech sector has turned around this year. The first half has been pretty strong for companies in this space.

The sector does have its share of challenges in the form of rising competition, high profile pipeline setbacks, slowdown in growth of mature products and loss of exclusivity for certain key drugs. The drug pricing issue remains a headline risk this year too.

Nonetheless, strong performance of newer drugs, evolving pipelines, impressive clinical trial results, new drug approvals, continued strong performance of legacy products and rising demand are some of the factors that promise a sustained recovery in the sector.

Within this broad sector, one of the better performing industries is “Large Cap Pharmaceuticals” which includes some of the world’s largest and most recognizable drug making companies.

In this sector, Sanofi (SNY Quick QuoteSNY - Free Report) - headquartered in Paris, France - and AstraZeneca plc (AZN Quick QuoteAZN - Free Report) - based in Cambridge, the United Kingdom - have been attracting attention this year.

Both stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Meanwhile, the Large Cap Pharmaceutical Industry is currently ranked 53rd out of 265 industries by Zacks, placing it in the top 20% of all industries. While they share the same Zacks Rank and operate in the same strong industry, the stocks differ from each other in what they offer to investors: These stocks also look well-placed to enjoy a good run going forward.

New Drugs Contributing Well

AstraZeneca boasts a strong product portfolio and is one of the key players in the global cardiovascular market. Though its key products like Crestor and Nexium have been facing declining sales due to generic competition, newer drugs like antiplatelet treatment Brilinta, Lynparza (ovarian cancer), Farxiga/Forxiga (type II diabetes) Movantik/Moventig (opioid-induced constipation) and Tagrisso (lung cancer) are off to an encouraging start. AstraZeneca is looking for further label expansions for these drugs.

Sanofi possesses a diversified product portfolio with a presence in several therapeutic areas including cardiovascular diseases, diabetes, oncology, and CNS disorders, among others. Sanofi also possesses one of the world’s leading vaccine operations.

Sanofi has also been progressing with new product launches. Among the recently approved drugs, Lemtrada and Aubagio, Sanofi’s oral treatment for relapsing forms of multiple sclerosis (MS), are generating strong sales. We believe that both Lemtrada and Aubagio possess significant commercial potential.

Key Drug Approvals this Year

Important drugs of Sanofi and AstraZeneca were approved/launched this year. Sanofi’s Rheumatoid arthritis (RA) drug Kevzara was approved in the U.S., Canada and the EU this year. Meanwhile, Dupixent/dupilumab was approved by the FDA for treating atopic dermatitis in Mar 2017 and is now available to adult patients in the U.S. The drug is under review in the EU for the same indication. Soliqua, a once-daily titratable fixed-ratio combination of Lantus and Lyxumia, was launched in the U.S. in Jan 2017 and is expected to be launched in Europe later this year.

These new drugs have the potential to boost Sanofi’s sales in the next few years. Particularly, weare optimistic on sales prospects of Dupixent, which could prove to be an important growth driver for the company. Dupixent is being evaluated for several other indications like asthma and nasal polyposis.

For AstraZeneca, key pipeline candidate, Imfinzi (durvalumab) was approved in the U.S. for treatment-experienced urothelial carcinoma (UC) in May 2017. Meanwhile, Imfinzi (durvalumab) is being evaluated for multiple cancers (either alone or in combination with other regimens), including phase III trials in first-line urothelial cancer, NSCLC, small cell lung cancer and head and neck squamous cell carcinoma (HNSCC) among others. Imfinzi is expected to be a key top-line growth driver for AstraZeneca in the long term.

Pipeline Matters

For any pharma or biotech company, the pipeline is of utmost importance and plays an important role in investment decisions. So, it always makes sense to take a look at a company’s pipeline.

Sanofi is focusing its R&D efforts on key technologies and diseases, which hold greater commercial potential. At the end of Apr 2017, Sanofi’s pipeline comprised 46 pharmaceutical new molecular entities and vaccine candidates in development, of which 13 were in phase III studies or under regulatory review. Promising candidates include sotagliflozin (SGLT-1 and SGLT-2 inhibitor for diabetes) and isatuximab (multiple myeloma and acute lymphoblastic leukemia).

Promising candidates in AstraZeneca’s pipeline or under regulatory review include benralizumab (asthma and chronic obstructive pulmonary disease (COPD), ZS-9 (hyperkalemia) tralokinumab (asthma), anifrolumab (systemic lupus erythematosus and lupus nephritis), roxadustat (anemia in patients with chronic kidney disease) and AZD3293 (Alzheimer’s disease). AstraZeneca is working on strengthening its oncology product portfolio and has several candidates in its pipeline. The company’s target is to launch at least six new oncology medicines between 2014 and 2020. Immuno-oncology, a therapeutic area, is presently attracting a lot of interest and represents huge commercial potential.

Meanwhile both the companies have been streamlining their business by pursuing regular accretive business development deals. Sanofi has collaboration agreements with companies like Regeneron Pharmaceuticals, Inc. (REGN Quick QuoteREGN - Free Report) while AstraZeneca is pursuing co-development deals with companies like Nektar, Eli Lilly & Company (LLY Quick QuoteLLY - Free Report) and others to boost its pipeline. The companies have also made strategic acquisitions, both big and small, from time to time.

Meanwhile, both the companies are working on reducing the impact of genericization on key products by trimming their cost structure to drive operational efficiency.

Share Price, Estimate Revisions and Valuation

In terms of share price, both stocks have moved more or less in tandem and therefore it is difficult to single out a winner. As discussed, both stocks have risen so far this year. This comes after share price declines witnessed in 2016.

Shares of AstraZeneca have risen 25% so far this year, outperforming a gain of 12.1% for the Zacks classified Large-Cap Pharma industry.

Sanofi has risen 18.2% this year, also outperforming the Large Cap Pharma sector.

Sanofi’s earnings estimates for 2017 have gone up 3.3% while that for 2018 have moved up 1.2% in the past 60 days. Sanofi’s earnings performance has also been pretty impressive, with steady positive surprises. The average earnings beat for the last four quarters is 5.10%.

AstraZeneca’s earnings estimates for 2017 went up 0.5% while that for 2018 moved up 3.3% in the past 60 days. Its earnings performance has also been pretty impressive, with consistent positive surprises. The average earnings beat for the last four quarters is 142.6%.

However, when we compare the stocks’ valuation on a P/E basis, Sanofi holds an edge.

A study of AstraZeneca’s forward P/E (F12M basis) multiple reflects that the stock is quite overvalued. The multiple currently stands at 18.23, stretched when compared to its own range (median of 18.20). Comparison with the Zacks categorized Large Cap Pharma industry is unfavorable as the current P/E (F12M basis) for the industry is 15.96 for the last three months.

Sanofi, on the other hand, is trading at a discount using the same forward P/E (F12M basis) multiples. The multiple currently stands at 14.76 for Sanofi, representing a discount to that of the Large Cap Pharma industry. The stock is also attractively valued when compared to its own range (median of 15.10).

AstraZeneca is also overvalued when compared with the S&P 500 P/E (F12M basis) multiple of 17.88 while Sanofi is undervalued compared to the same.

A Neck and Neck Contest

Without doubt, both Sanofi and AstraZeneca have delivered the goods this year and choosing between the two is a tall order. Both have their share of strengths and weaknesses. Both Sanofi and AstraZeneca are facing generic competition and pricing pressure for some products. The diabetes businesses of both the companies are having a tough time due to competitive pressure. They have also bitter experiences in the form of pipeline and regulatory setbacks. So we can say that the two companies stand on an equal footing to take on the second half.

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