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4 Large Drug Stocks to Watch as the Industry Recovers

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It was a mixed first-quarter earnings season for the drug and biotech sector. Though the results were mixed, most companies maintained their previously issued financial outlook for 2022, suggesting their optimism for the rest of the year.

The drugmakers continued their R&D efforts, making significant scientific advances even throughout the pandemic. It is expected that innovation will continue to drive growth in the sector in 2022 with advances expected to be made in areas like Alzheimer’s, cell and gene therapy and mRNA research. Among the large drugmakers, Eli Lilly (LLY - Free Report) Novo Nordisk (NVO - Free Report) , Merck (MRK - Free Report) and Glaxo (GSK - 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 like 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 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 large drug 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 ofdollars 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, the 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.The fast-growing and lucrative markets such as oncology and cell and gene therapy are likely to remain focus areas for M&A activities. Also, collaborations and partnerships with smaller companies are in full swing.In 2022 so far, though there have been plenty collaboration and licensing deals, $1 billion-plus acquisition deals have been scanty.

Pipeline Setbacks & Other Headwinds: Thefailure of key pipeline candidates in pivotal studies and regulatory and pipeline delays can be setbacks for large drug companies and significantly hurt their share prices. 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 for physician-administered drugs of most companies. Though trends recovered in 2021, infection rates shot up significantly in the last quarter of 2021 with the rapid spread of the Omicron variant. There is still uncertainty about the duration and contemplated impact of the pandemic on companies’ results and outlook in 2022, given the risk of future variants of concern.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Large Cap Pharmaceuticals industryis a 14-stock group within the broader Medical sector.  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 #88, which places it in the top 35% 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 industry has outperformed the S&P 500 as well as the Zacks Medical Sector this year so far.

Stocks in this industry have collectively risen 4.2% this year so far against the Zacks S&P 500 composite’s decline of 14.6% and the Zacks Medical Sector’s decline of 12.8% 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 14.90X compared with the S&P 500’s 17.63X and the Zacks Medical Sector's 20.12X.

Over the last five years, the industry has traded as high as 16.00X, as low as 13.18X and at a median of 14.90X as the chart below shows.

 

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

4 Large Drugmakers to Keep an Eye On

Eli Lilly: Eli Lilly boasts a solid portfolio of core drugs for diabetes, autoimmune diseases and cancer. Its revenue growth is being driven by higher demand for drugs like Trulicity, Taltz, and others. It is regularly adding promising new pipeline assets through business development deals. It has an exciting pipeline of potential new medicines, including tirzepatide for type II diabetes and donanemab for early Alzheimer's disease. Both candidates have multibillion-dollar sales potential.

Lilly has a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for 2022 EPS has declined from $8.78 per share to $8.34 per share over the past 30 days. The stock has risen 6.8% this year so far. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: LLY

 

Novo Nordisk: Novo Nordisk has one of the broadest diabetes portfolios in the industry, with an extensive portfolio of insulin drugs and diabetes-related products. Semaglutide remains the growth engine for the company. It is approved as Ozempic pre-filled pen and Rybelsus oral tablet for type II diabetes and as Wegovy for weight management. Ozempic, Rybelsus, Xultophy and Saxenda have been helping the company maintain momentum. Label expansion of these existing drugs is expected to further boost sales. Novo Nordisk has also significantly stepped up its M&A activity in the past two years.

Novo Nordisk has a Zacks Rank #3. The Zacks Consensus Estimate for this Danish drugmaker’s 2022 EPS has risen from $3.32 to $3.44 over the past 30 days. The stock has declined 7.6% this year so far.

Price and Consensus: NVO

Merck: Merck has a Zacks Rank of 3. The company boasts more than six blockbuster drugs in its portfolio with the PD-L1 inhibitor, Keytruda, approved for several types of cancer and alone accounting for around 40% of its pharmaceutical sales. Keytruda, Lynparza and Bridion have been driving sales.

Keytruda has played an instrumental role in driving Merck’s steady revenue growth in the past few years. Keytruda is growing continuously and expanding into new indications and markets globally. With continued label expansion into new indications & early-stage settings, Keytruda is expected to remain a key top-line driver.

Animal health and vaccine products are core growth drivers. Merck’s new COVID oral antiviral pill, Lagevrio will be a key top-line driver in 2022. Merck boasts a strong cancer pipeline, including Keytruda, which should help drive long-term growth.

Shares of Merck have risen 20.1% in the past year. The Zacks Consensus Estimate for 2022 EPS has risen from $7.19 to $7.28 over the past 30 days.

Price and Consensus: MRK

Glaxo: Glaxo’s specialty products like Dovato, Nucala, Trelegy Ellipta, Shingrix, Juluca are driving sales, making up for a decline in Established Pharmaceuticals due to generic erosion. Glaxo has made significant progress in its pipeline. In 2022, Glaxo expects data readouts on multiple late-stage pipeline vaccines and medicines, which could be future growth drivers, including the RSV vaccine for older adults and several new potential specialty treatments for rheumatoid arthritis, cancer and hepatitis B.

Glaxo plans to split itself into two standalone companies. The new Glaxo will be a biopharma company focusing on developing new treatments. Glaxo intends to separate its Consumer Healthcare (CHC) segment into a standalone company in July 2022. The independent Consumer Healthcare company will be named Haleon. The spin-off of the Consumer unit will allow Glaxo to focus on its drug development

The Zacks Consensus Estimate for 2022 EPS has declined from $3.25 to $3.18 over the past 30 days.Glaxo is a #3 Ranked stock. This British drugmaker’s stock has declined 1.1% this year so far.

Price and Consensus: GSK