The large drugmakers have lately witnessed rapid development in their R&D efforts for COVID-19 medicines and vaccines. Several medicines and vaccines have been granted emergency use authorizations by the FDA and other global regulatory bodies in the past couple of months. This has brought companies like Pfizer (
PFE Quick Quote PFE - Free Report) , Merck ( MRK Quick Quote MRK - Free Report) , Novartis ( NVS Quick Quote NVS - Free Report) and other big drugmakers on track after a lukewarm Q3.
In the third quarter, almost all companies witnessed improvement in demand trends as global economies began to recover. However, the pace of recovery was slower than expected due to rising cases of infections. Accordingly, most companies maintained a cautious outlook for the fourth quarter with some retaining or tightening 2020 guidance.
Large Cap Pharmaceuticals industry comprises some of the largest global companies that develop multi-million dollar drugs for a broad range of therapeutic areas such as neuroscience, cardiovascular and metabolism, rare diseases immunology and oncology. Some of these companies also make vaccines, animal health, medical devices and consumer related healthcare products. All these players invest millions of dollars in their product pipelines and line extensions of their already marketed drugs. What’s Shaping the Future of the Large-Cap Pharma Industry? For big drugmakers, innovation in their pipeline is a competitive necessity and key to top-line growth. Pharma companies are constantly striving to ramp up innovation and spending a significantly high portion of their revenues on R&D. Successful innovation and product line extensions in important therapeutic areas and strong clinical study results may act as important catalysts for these stocks. Innovation and Pipeline Success: The sector is characterized by aggressive M&A activity. Given that it takes several years and millions of dollars to develop new therapeutics from scratch, large pharmaceutical companies sitting on huge piles of cash regularly buy innovative small/mid-cap biotech companies to build out their pipelines. Also, sloppy sales of mature drugs, dwindling in-house pipelines, government scrutiny of drug prices and emergence of big tech firms like Apple and Google in the healthcare industry whet the M&A appetite of large drugmakers. However, after a flurry of deals in 2019, M&A activity significantly slowed down in 2020, mainly due to the impact of the coronavirus pandemic. Nonetheless, AstraZeneca’s recent offer to buy biotech giant, Alexion indicates that M&A activity might pick up once again in 2021. Meanwhile, collaborations and partnerships with smaller companies are in full swing this year, mainly for making antivirals and vaccines for COVID-19. Aggressive M&A & Collaboration Activity: Failure of key pipeline candidates in pivotal studies and regulatory and pipeline delays can be setbacks for large drug companies and significantly hurt their share price. Other headwinds for the industry include government scrutiny of high drug prices, pricing and competitive pressure, generic competition for blockbuster treatments and slowdown in sales of some of the most high-profile older drugs. Pipeline Setbacks & Other Headwinds: : The pandemic hurt demand trends of physician-administered drugs of most companies, mainly in the early phase of the pandemic. Though trends recovered somewhat in the second half of 2020, the recovery has been at a slower pace than originally expected due to rising cases of infections amid a second wave of the pandemic. Overall, there is increased uncertainty around the timing and magnitude of sales of large drugmakers during the COVID-19 pandemic. Uncertainty Surrounding the Pandemic Zacks Industry Rank Indicates Bright Prospects
Zacks Industry Rank is basically the average of the Zacks Rank of all the member stocks.
The Zacks Large Cap Pharmaceuticals industry currently carries a Zacks Industry Rank #118, which places it in the top 46% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Before we present a few large drug stocks that are well positioned to outperform the market based on a strong earnings outlook, let’s take a look at the industry’s performance and its current valuation.
Industry Underperforms S&P 500 &Sector
The Zacks Large Cap Pharmaceuticals industry is a 14-stock group within the broader
Medical sector. It has underperformed the S&P 500 as well as the Zacks Medical Sector on a year-to-date basis.
While the stocks in this industry have collectively risen 3% year to date, the Zacks S&P 500 composite and the Zacks Medical Sector have risen 6% and 17.1%, respectively.
Year-to-Date Price Performance
Industry’s Current Valuation
On the basis of the forward 12-month price-to-earnings (P/E), a commonly used multiple for valuing large pharma companies, the industry is currently trading at 14.39X compared with the S&P 500’s 23.06X and the Zacks Medical sector's 22.55X.
Over the last five years, the industry has traded as high as 16.62X, as low as 13.18X and at a median of 15.09X as the chart below shows.
Forward 12 Month Price-to-Earnings (P/E) Ratio
3 Large Drugmakers to Keep an Eye On Pfizer: The Consumer Healthcare joint venture with Glaxo and the merger of Upjohn unit with Mylan has made Pfizer a smaller company with a diversified portfolio of innovative drugs and vaccines. The smaller Pfizer should see better revenue growth as the Lyrica loss of exclusivity (LOE) cliff will go away. Pfizer expects strong growth of key brands like Ibrance, Inlyta and Eliquis to drive sales. It has a strong portfolio of new drugs, which will accelerate growth. Importantly, it progressed rapidly with development/regulatory plans of its COVID-19 vaccine candidate. The vaccine is now approved for emergency use in several countries including the United States and Europe. The emergency approval for its COVID-19 vaccine came in less than a year since the companies started developing it, which is probably the fastest in the history of vaccines. The company has a Zacks Rank #3 (Hold).
The Zacks Consensus Estimate for this New York based drugmaker’s 2021 EPS has risen 14.5% over the past 30 days. The stock has declined 4.9% so far this year.
Price and Consensus: PFE
Merck: Merck boasts more than six blockbuster drugs in its portfolio with PD-L1 inhibitor, Keytruda, approved for several types of cancer. Keytruda, Lynparza and Bridion have been driving Merck’s sales growth. Keytruda sales are gaining from continued uptake in lung cancer and increasing usage in other cancer indications. Merck’s Animal health and vaccine products remain core growth drivers. In February 2020, Merck announced that it will spin off products from its Women’s Health unit, legacy drugs and biosimilar products into a new publicly traded company called Organon & Co. The potential separation into two companies makes strategic sense as the remaining Merck should be able to achieve higher profits than the combined company. However, sales of some key products like Gardasil 9 vaccine are being hurt due to COVID-19 related business disruption. Merck has a Zacks Rank #3.
The Zacks Consensus Estimate for this Kenilworth, NJ -based drugmaker’s 2021 EPS has risen 1.5% over the past 60 days. The stock has declined 12.9% so far this year.
Price and Consensus: MRK
Novartis: Novartis, a #3 Ranked stock, boasts a strong oncology portfolio. Novartis’ relatively newer drugs like Kisqali, Entresto and gene therapy, Zolgensma have boosted sales in recent quarters despite COVID-19 hurting demand for some drugs. New launches like Piqray, Mayzent and Beovu should boost sales in 2021 and thereafter. The biosimilars portfolio also gains traction with new approvals and is expected to drive growth.
Shares of this Swiss drugmaker have declined 6.6% this year so far. The Zacks Consensus Estimate for 2021 EPS has been revised 2.4% upward over the past 60 days.
Price and Consensus: NVS