The Zacks 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 companies invest millions of dollars in their product pipelines as well as line extensions of their already marketed drugs.
Here are the three major themes in the industry:
- Demand-driven growth in sales of new products, successful innovation and product line expansion, strong clinical study results, frequent FDA approvals, continued strong performance of key products, growing demand for drugs, especially for rare-to-treat diseases, an aging population and increased health care spending are some of the factors driving this industry’s growth. A faster drug approval process and the proposed removal of outdated regulations, which are escalating costs and slowing down innovation, are the other positives.
- Mergers and acquisitions (M&A) activity is on the rise following the tax reform. Big players are on the lookout for companies with innovative pipelines/technology. Meanwhile, in-licensing deals continue to be popular with several big companies collaborating with smaller and mid-sized players with promising mid-to-late stage pipeline candidates or interesting technology. These deals make sense for both the larger companies and the smaller ones. While the large companies are able to boost their pipelines with promising candidates, the smaller ones gain access to a non-dilutive source of funds that allows them to continue investing in their pipelines.
- Headwinds for the industry include government scrutiny of high drug prices, pricing pressure, increasing competition, rising competition related to biosimilar and generic, a slowdown in growth of legacy products and major pipeline setbacks.
Overall, we believe that pipeline success, cost cutting, share buybacks, product launches, increased M&A and collaboration activities should keep the sector afloat, going forward.
Zacks Industry Rank Indicates Bright 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 #76, which places it at the top 30% 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.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimate for the current year has increased by 5.5% while it is up 3.1% for 2019.
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 stock-market performance and current valuation.
Industry Outperforms Sector & S&P 500
The Zacks Large Cap Pharmaceuticals Industry is a 14-stock group within the broader Medical sector. The industry has outperformed 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 2.3% year to date, the Zacks S&P 500 composite and the Zacks Medical Sector have declined 0.4% and 3.2%, respectively.
Year-to-Date Price Performance
Industry’s Current Valuation
On the basis of forward 12-month price-to-earnings (P/E) ratio, which is a commonly used multiple for valuing large pharma companies, the industry is currently trading at 14.62X compared to the S&P 500’s 15.78X and the Zacks Medical sector's 18.62X.
Over the last five years, the industry has traded as high as 18.10X, as low as 13.94X, and at a median of 15.85X, as the chart below shows.
Forward 12 Month Price-to-Earnings (P/E) Ratio
In order to succeed in a changing global market and evolving healthcare landscape, pharmaceutical companies need to adopt innovative business models, invest in new technologies, increase investments in personalized medicines and seek external partners and collaborators for complementary strengths.
The sector may face some volatility due to the drug pricing issue, pricing/re-imbursement pressure, increasing competition, slowdown in legacy product sales, loss of patent exclusivity of some key drugs and pipeline related setbacks.
However, pipeline success in innovative and important therapeutic areas, cost cutting, share buybacks, product launches, increased M&A activity and appropriate utilization of cash should keep the sector on a strong footing.
In the Large Cap Pharmaceuticals universe, one stock currently sports a Zacks Rank #1 (Strong Buy), while four companies have a Zacks Rank #2 (Buy). Most of these companies have witnessed positive earnings estimate revisions in the past 60 days.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Bristol-Myers Squibb Company (BMY - Free Report) : The Zacks Consensus Estimate for this New York based drugmaker’s current-year EPS has been revised 6.1% upward over the past 60 days. Bristol-Myers has a Zacks Rank #1. However, the stock has declined 18.4% so far this year.
Price and Consensus: BMY
Merck & Co., Inc. (MRK - Free Report) : This Kenilworth, NJ-based drug giant has seen 29.5% rise in its share price this year so far. The Zacks Consensus Estimate for this #2 Ranked stock's current-year EPS has risen 1.1% over the past 60 days.
Price and Consensus: MRK
Eli Lilly & Company (LLY - Free Report) : The stock of this Indianapolis, IN-based drugmaker has risen 28.3% year to date. The current fiscal Zacks Consensus Estimate EPS estimate for this Zacks Rank #2 company has risen 0.9% over the past 60 days.
Price and Consensus: LLY
Johnson & Johnson (JNJ - Free Report) : The stock of this New Brunswick, NJ maker of drugs,medical, and consumer products has risen 0.8% so far this year. The consensus estimate for the current-year EPS has been revised 0.2% upward over the past 60 days. J&J has a Zacks Rank #2.
Price and Consensus: JNJ
Roche Holding AG (RHHBY - Free Report) : Shares of this Swiss drugmaker have declined 5.3% this year so far. The Zacks Consensus Estimate for current-year EPS has been revised 4.1% upward over the past 60 days. Roche has a Zacks Rank #2.
Price and Consensus: RHHBY
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