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4 Large Drug Stocks to Watch as Fundamentals Stay Strong
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Investors flocked to the biotech industry during the pandemic years of 2020 and 2021. The successful vaccines and effective antivirals made by the big drugmakers sent the pandemic to the rear-view mirror early his year. However, the post-pandemic trade recovery and strong economic growth have shifted investors’ money to the less expensive sectors. This coupled with a rapid rise in interest rates and inflation has sent biotech valuations plunging recently.
Nonetheless, though biotech industry valuations are currently experiencing a correction, fundamentals remain strong. It is expected that innovation will continue to drive growth in the industry in the second half of 2022 and into 2023. Meanwhile, M&A deals are also picking up, which is a sign of growth. Among the large drugmakers, AbbVie (ABBV - Free Report) , Novartis (NVS - Free Report) , Merck (MRK - 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 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 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 a 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.With target valuations dropping to historic lows, big pharma players may use the opportunity for large-scale M&A later this year.
Pipeline Setbacks & Other Headwinds: The 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 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 hurt demand trends of 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. In 2022 so far, major waves of variants of concern have emerged quickly, become dominant and have been superseded by the next variant. There is still uncertainty about the duration and contemplated impact of the pandemic on companies’ results and outlook in the second half of 2022.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Large Cap Pharmaceuticals industry is a 13-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 #99, which places it in the top 40% 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 declined 3.7% this year so far compared with the Zacks S&P 500 composite’s decline of 17.9% and the Zacks Medical Sector’s decline of 20.1% in the said time frame.
Year-to-Date Price Performance
Industry's Current Valuation
Based on the forward 12-month price-to-earnings (P/E), a commonly used multiple for valuing large pharma companies, the industry is currently trading at 13.99X compared with the S&P 500’s 16.98X and the Zacks Medical Sector's 20.59X.
Over the last five years, the industry has traded as high as 16.16X, as low as 13.31X and at a median of 14.83X as the chart below shows.
Forward 12-Month Price-to-Earnings (P/E) Ratio
4 Large Drugmakers to Keep an Eye On
AbbVie: AbbVie has successfully expanded the labels of its cancer drugs, Imbruvica and Venclexta. It has several new drugs in its portfolio, which have the potential to drive revenues once Humira loses U.S. exclusivity in 2023. New immunology drugs, Skyrizi and Rinvoq are going strong, bolstered by approval in new indications. AbbVie has several early/mid-stage candidates that have blockbuster potential. Allergan’s acquisition has diversified AbbVie’s revenue base into new therapeutic areas, enhancing its long-term growth potential.
Merck: Merck has a Zacks Rank of 3. The company boasts more than six blockbuster drugs in its portfolio, including the PD-L1 inhibitor, Keytruda, which is approved for several types of cancer and alone accounts for around 40% of its pharmaceutical sales. Keytruda, Gardasil vaccine and Bridion have been driving sales.
Keytruda has played an instrumental role in driving Merck’s 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 has been 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 13.2% in the past year. The Zacks Consensus Estimate for 2022 EPS has risen from $7.32 to $7.33 over the past 30 days.
Price and Consensus: MRK
Novartis: Novartis has a strong and diverse portfolio. Solid momentum in key brands like psoriasis drug, Cosentyx, a cardiovascular drug, Entresto, gene therapy, Zolgensma, the oncology portfolio, and the launch of Kesimpta continue to boost performance. The launch of additional drugs like Pluvicto, Piqray, Leqvio and Mayzent, and the label expansion of key drugs should also boost performance further. The pipeline progress is also impressive and the company has some promising candidates. Management’s focus on cost savings should boost the bottom line as well. Management recently decided to separate its generics business, Sandoz into a separate company to focus on its core pharma business.
The Zacks Consensus Estimate for 2022 EPS has remained stable at $6.06 per share over the past 30 days.Novartis is a #3 Ranked stock. This Swiss drugmaker’s stock has declined 7.7% this year so far.
Price and Consensus: NVS
AstraZeneca: AstraZeneca’s key drugs, mainly cancer medicines, Lynparza, Tagrisso and Imfinzi should keep driving revenues. Its pipeline is strong, with several phase III data readouts lined up. It has also been engaged in external acquisitions and strategic collaborations to boost its pipeline while investing in geographic areas of high growth like emerging markets. Cost-cutting efforts should drive earnings. The Alexion buyout strengthens its immunology franchise, adding several drugs that can boost its top line
AstraZeneca has a Zacks Rank #3. The Zacks Consensus Estimate for this British drugmaker’s 2022 EPS has remained stable at $3.31 over the past 30 days. The stock has declined 0.2% this year so far.
Price and Consensus: AZN
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4 Large Drug Stocks to Watch as Fundamentals Stay Strong
Investors flocked to the biotech industry during the pandemic years of 2020 and 2021. The successful vaccines and effective antivirals made by the big drugmakers sent the pandemic to the rear-view mirror early his year. However, the post-pandemic trade recovery and strong economic growth have shifted investors’ money to the less expensive sectors. This coupled with a rapid rise in interest rates and inflation has sent biotech valuations plunging recently.
Nonetheless, though biotech industry valuations are currently experiencing a correction, fundamentals remain strong. It is expected that innovation will continue to drive growth in the industry in the second half of 2022 and into 2023. Meanwhile, M&A deals are also picking up, which is a sign of growth. Among the large drugmakers, AbbVie (ABBV - Free Report) , Novartis (NVS - Free Report) , Merck (MRK - 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 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 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 a 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.With target valuations dropping to historic lows, big pharma players may use the opportunity for large-scale M&A later this year.
Pipeline Setbacks & Other Headwinds: The 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 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 hurt demand trends of 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. In 2022 so far, major waves of variants of concern have emerged quickly, become dominant and have been superseded by the next variant. There is still uncertainty about the duration and contemplated impact of the pandemic on companies’ results and outlook in the second half of 2022.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Large Cap Pharmaceuticals industry is a 13-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 #99, which places it in the top 40% 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 declined 3.7% this year so far compared with the Zacks S&P 500 composite’s decline of 17.9% and the Zacks Medical Sector’s decline of 20.1% in the said time frame.
Year-to-Date Price Performance
Industry's Current Valuation
Based on the forward 12-month price-to-earnings (P/E), a commonly used multiple for valuing large pharma companies, the industry is currently trading at 13.99X compared with the S&P 500’s 16.98X and the Zacks Medical Sector's 20.59X.
Over the last five years, the industry has traded as high as 16.16X, as low as 13.31X and at a median of 14.83X as the chart below shows.
Forward 12-Month Price-to-Earnings (P/E) Ratio
4 Large Drugmakers to Keep an Eye On
AbbVie: AbbVie has successfully expanded the labels of its cancer drugs, Imbruvica and Venclexta. It has several new drugs in its portfolio, which have the potential to drive revenues once Humira loses U.S. exclusivity in 2023. New immunology drugs, Skyrizi and Rinvoq are going strong, bolstered by approval in new indications. AbbVie has several early/mid-stage candidates that have blockbuster potential. Allergan’s acquisition has diversified AbbVie’s revenue base into new therapeutic areas, enhancing its long-term growth potential.
AbbVie has a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for 2022 EPS has remained stable at $13.90 per share over the past 30 days. The stock has risen 5.2% this year so far. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: ABBV
Merck: Merck has a Zacks Rank of 3. The company boasts more than six blockbuster drugs in its portfolio, including the PD-L1 inhibitor, Keytruda, which is approved for several types of cancer and alone accounts for around 40% of its pharmaceutical sales. Keytruda, Gardasil vaccine and Bridion have been driving sales.
Keytruda has played an instrumental role in driving Merck’s 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 has been 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 13.2% in the past year. The Zacks Consensus Estimate for 2022 EPS has risen from $7.32 to $7.33 over the past 30 days.
Price and Consensus: MRK
Novartis: Novartis has a strong and diverse portfolio. Solid momentum in key brands like psoriasis drug, Cosentyx, a cardiovascular drug, Entresto, gene therapy, Zolgensma, the oncology portfolio, and the launch of Kesimpta continue to boost performance. The launch of additional drugs like Pluvicto, Piqray, Leqvio and Mayzent, and the label expansion of key drugs should also boost performance further. The pipeline progress is also impressive and the company has some promising candidates. Management’s focus on cost savings should boost the bottom line as well. Management recently decided to separate its generics business, Sandoz into a separate company to focus on its core pharma business.
The Zacks Consensus Estimate for 2022 EPS has remained stable at $6.06 per share over the past 30 days.Novartis is a #3 Ranked stock. This Swiss drugmaker’s stock has declined 7.7% this year so far.
Price and Consensus: NVS
AstraZeneca: AstraZeneca’s key drugs, mainly cancer medicines, Lynparza, Tagrisso and Imfinzi should keep driving revenues. Its pipeline is strong, with several phase III data readouts lined up. It has also been engaged in external acquisitions and strategic collaborations to boost its pipeline while investing in geographic areas of high growth like emerging markets. Cost-cutting efforts should drive earnings. The Alexion buyout strengthens its immunology franchise, adding several drugs that can boost its top line
AstraZeneca has a Zacks Rank #3. The Zacks Consensus Estimate for this British drugmaker’s 2022 EPS has remained stable at $3.31 over the past 30 days. The stock has declined 0.2% this year so far.
Price and Consensus: AZN