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4 Big Drugmaker Stocks to Watch Out For as Recovery Gains Steam

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The second-quarter earnings season was a strong one for the large drugmakers with most of them beating estimates for both earnings and sales. Almost all companies witnessed a recovery in sales of their key products/drugs from the earlier impacts of the pandemic in Q2 and sounded optimistic of continued improvement in the second half.

With regard to pipeline developments, the drug/biotech industry continues to witness improvements in drug research in 2021 while withstanding the impact of the pandemic remarkably well. Though regulatory/pipeline updates related to COVID-19 medicines/vaccines continued to take center stage this year as well, the sector has been witnessing developments in other innovative pipeline areas like Alzheimer’s. Johnson & Johnson (JNJ - Free Report) , Roche (RHHBY - Free Report) , Pfizer (PFE - Free Report) and AstraZeneca (AZN - Free Report) are worth retaining in your portfolio.

Industry Description

The Zacks Large Cap Pharmaceuticals industry comprises some of the largest global companies that developmulti-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. Continuous innovation is a defining characteristic of pharma companies and these large drugmakers are constantly investing in drug development and the discovery of new medicines. Regular mergers and acquisitions and collaboration deals are another key feature of such companies.

What's Shaping the Future of the Large-Cap Pharma Industry?

Innovation and Pipeline Success: 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.

Aggressive M&A & Collaboration Activity: 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 the 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, M&A activity picked up again in 2021. Also, collaborations and partnerships with smaller companies are in full swing, mainly for making antivirals, antibodies and vaccines for COVID-19.

Pipeline Setbacks & Other Headwinds: 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 pricing and competitive pressure, generic competition for blockbuster treatments, and a slowdown in sales of some of the most high-profile older drugs.

Uncertainty Surrounding the Pandemic: The pandemic has hurt demand trends of physician-administered drugs of most companies. Though trends are recovering, there is still uncertainty about the duration and contemplated impact of the pandemic on the companies’ results and outlook, particularly with the recent surge of the Delta variant.

Zacks Industry Rank Indicates Solid Prospects

The group’s 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 #114, which places it in the top 45% 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 Versus S&P 500 & Sector

The Zacks Large Cap Pharmaceuticals industryis a 14-stock group within the broader Medical sector. It has underperformed the S&P 500 but outperformed the Zacks Medical Sector on a year-to-date basis.

Stocks in this industry have collectively risen 15.6% year to date compared with the Zacks S&P 500 composite’s rise of 22%. The Zacks Medical Sector has declined 0.4% in the said time frame.

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 15.32X compared with the S&P 500’s 21.91X and the Zacks Medical sector's 23.90X.

Over the last five years, the industry has traded as high as 16.00X, as low as 13.18X and at a median of 14.99X as the chart below shows.

Forward 12 Month Price-to-Earnings (P/E) Ratio


 

4 Large Drugmakers to Keep an Eye On

Pfizer: Pfizer has been riding high on the success of its two-shot vaccine for COVID-19, Comirnaty, which it developed in partnership with Germany-based company, BioNTech. In the first half of 2021, the vaccine contributed $14.1 billion to Pfizer’s global sales.  The pharma giant expects to record $33.5 billion in revenues from BNT162b2 in 2021.Pfizer/BioNTech have already delivered more than a billion doses of BNT162b2 to help vaccinate the global population. They expect to manufacture in total up to 3 billion doses by the end of December 2021 and have agreements (signed through mid-July 2021) in place to deliver 2.1 billion doses in 2021.

Overall, the Consumer Healthcare joint venture with Glaxo and the merger of Upjohn unit with Mylan (now Viatris) has made this Zacks Rank #3 (Hold) stock a smaller company with a diversified portfolio of innovative drugs and vaccines. The smaller Pfizer should see better revenue growth. Pfizer expects strong growth of key brands like Ibrance, Inlyta, and Eliquis to continue to drive salesthis year. Pfizer boasts a sustainable pipeline with multiple late-stage programs that can drive growth

The Zacks Consensus Estimate for this New York-based drugmaker’s 2021 EPS has risen 11.2% over the past 60 days. The stock has risen 27.3% so far this year.

Price and Consensus: PFE

 

Johnson & Johnson: J&J’s diversification makes it relatively resilient amid macroeconomic turmoil. Its Pharma unit is performing at above-market levels, supported by increased penetration and new indications of blockbuster drugs, Imbruvica, Darzalex, and Stelara. Its Medical Devices segment is also demonstrating a strong recovery after its sales were hurt in the early stages of the pandemic. Consumer segment sales have also rebounded. J&J is also making rapid progress with its pipeline and line extensions. Several pivotal data readouts are expected in 2021/2022. However, headwinds like generic competition and pricing pressure continue. J&J faces numerous lawsuits, which allege personal injuries to patients caused by the use of its products. These lawsuits have resulted in uncertainties. J&J has a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank(Strong Buy)stocks here.

The Zacks Consensus Estimate for this New Brunswick, NJ-based drugmaker’s 2021 EPS has risen 1.5% over the past 60 days. The stock has risen 11.2% so far this year.

Price and Consensus: JNJ

 

AstraZeneca: AstraZeneca, a #3 Ranked stock’s newer drugs, mainly cancer medicines, Lynparza, Tagrisso, and Imfinzi should keep driving revenues. Its pipeline is strong with several phase III data readouts lined up. AstraZeneca has also engaged in external acquisitions and strategic collaborations to boost its pipeline while investing in geographic areas of high growth like China. Cost-cutting efforts should drive earnings. The Alexion buyout strengthened its immunology franchise, adding several drugs that can boost its top line. Shares of this British drugmaker have risen 17.7% this year so far. The Zacks Consensus Estimate for 2021 EPS has been revised 0.8% upward over the past 60 days.

Price and Consensus: AZN

 

Roche: Roche’s pharmaceuticals business, which was adversely impacted by COVID-led disruptions and biosimilar competition, showed some recovery in the second quarter of 2021. The base diagnostics business also showed strong momentum and demand for COVID-19 tests peaked in the second quarter. Strong growth in Ocrevus, Evrysdi, Tecentriq, and Hemlibra is making up for biosimilar competition for Herceptin, Avastin, and MabThera. Further, label expansion of Tecentriq into additional indications should boost sales. The Diagnostics segment’s strong performance is likely to continue as Roche launched additional products in the first half. Shares of this Swiss drugmaker have risen 13.5% this year so far. The Zacks Consensus Estimate for 2021 EPS has been revised 2.6% upward over the past 60 days. Roche is a #3 Ranked stock.

Price and Consensus: RHHBY

 

 

 


 



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