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5 Large Drug Stocks to Watch as Sector Picks Up in 2023
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Fourth-quarter earnings were mixed for the large drugmakers, with most companies beating earnings estimates but missing on sales. Most large drugmakers issued conservative guidance for 2023, which suggests there might be upward revisions as the year progresses. After a pandemic-driven 2020 and 2021, the sector had a brutal 2022 with declining valuations of stocks and a slowing of new drug approvals. However, the sector is poised to be back on track. In 2023, even if the United States enters a recession, the sector is expected to perform well as demand for its products is not affected by a recession.
Overall, innovation is likely to drive growth in the industry in 2023. M&A deals are also picking up, which shows growth. Among the large drugmakers, J&J (JNJ - Free Report) , Novo Nordisk (NVO - Free Report) , AstraZeneca (AZN - Free Report) ,Novartis (NVS - Free Report) and Sanofi (SNY - Free Report) are worth retaining in your portfolio.
Industry Description
The Zacks Large Cap Pharmaceuticalsindustry 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 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.The year 2023 has begun with some big acquisition announcements. Amgen’s offered to buy Horizon Therapeutics for$27.8 billion in December 2022.
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.
Macroeconomic Uncertainty: 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, major waves of variants of concern emerged quickly, became dominant and were superseded by the next variant. There is still uncertainty surrounding the emergence of new variants and continued global surges.
Higher interest rates, inflationary pressures from rising energy prices, significant economic volatility, supply chain pressure and the war in Europe are creating an uncertain macro environment and economic volatility.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Large Cap Pharmaceuticals industry is a 12-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 #106, which places it in the top 42% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 and the Zacks Medical Sector in the past year.
Stocks in this industry have collectively risen 6.0% in the past year compared with the Zacks S&P 500 composite’s decline of 8.0% and the Zacks Medical Sector’s fall of 13.2%.
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 16.37X compared with the S&P 500’s 17.92X and the Zacks Medical Sector's 21.99X.
Over the last five years, the industry has traded as high as 17.20X, as low as 13.31X and at a median of 14.93X, as the chart below shows.
Forward 12-Month Price-to-Earnings (P/E) Ratio
5 Large Drugmakers to Keep an Eye On
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 #1 (Strong Buy). Estimates for its 2023 earnings per share have increased from $4.15 to $4.43 over the past 60 days. Estimates for 2024 have jumped from $4.38 per share to $5.19 over the same timeframe. The stock has surged 35.2% in the past year.
Sanofi: Sanofi’s Specialty Care unit is on a strong footing, particularly with the regular label expansion of Dupixent. Dupixent has become the key top-line driver for Sanofi. With outside U.S. revenues accelerating and multiple approvals for new indications, its sales are expected to be higher. Sanofi possesses a leading vaccine portfolio, which has become the primary top-line driver. Its R&D pipeline is strong. Several data readouts are expected in 2023. It has also launched several new drugs in the past couple of years and is expanding its pipeline through M&A deals. Sanofi has a Zacks Rank of 3.
Estimates for Sanofi’s 2024 earnings per share have increased from $4.79 per share to $4.89 in the past 60 days. The stock has lost 8.1% in the past year.
Price and Consensus: SNY
Novartis: Novartis has a strong and diverse portfolio. Solid momentum in key brands like Entresto, Kesimpta, Zolgensma, Kisqali and Leqvio is fueling growth, offsetting the impact of rising generic competition. 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. The planned spin-off of the Sandoz unit remains on track for the second half of 2023. The spin-off will allow Novartis to focus on its core pharma business.
The Zacks Consensus Estimate for 2023 EPS has risen from $6.45 per share to $6.50 while that for 2024 has jumped from $6.93 per share to $6.99 over the past 60 days.Novartis is a #3 Ranked stock. This Swiss drugmaker’s stock has risen 0.4% in the past year.
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 for 2023. 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. The Alexion buyout strengthened its immunology franchise, adding several drugs that are boosting its top line.
AstraZeneca has a Zacks Rank #3. The Zacks Consensus Estimate for this British drugmaker’s 2023 EPS has declined from $3.64 per share to $3.61 over the past 60 days while that for 2024 has decreased from $4.23 per share to $4.20. The stock has risen 5.3% in the past year.
Price and Consensus: AZN
Johnson & Johnson: J&J’s Pharma unit is performing above-market levels, supported by blockbuster drugs, Darzalex and Stelara, and contribution from newer drugs, Erleada and Tremfya. J&J is focusing on growing its MedTech unit through new products. J&J is making rapid progress with its pipeline and line extensions. It has taken meaningful steps to resolve its talc and opioid litigations.
J&J has a Zacks Rank #3. The Zacks Consensus Estimate for this large drugmaker’s 2023 EPS has risen from $10.29 per share to $10.50 over the past 60 days while that for 2024 has jumped from $10.79 per share to $10.94. The stock has declined 9.9% in the past year.
Price and Consensus: JNJ
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5 Large Drug Stocks to Watch as Sector Picks Up in 2023
Fourth-quarter earnings were mixed for the large drugmakers, with most companies beating earnings estimates but missing on sales. Most large drugmakers issued conservative guidance for 2023, which suggests there might be upward revisions as the year progresses. After a pandemic-driven 2020 and 2021, the sector had a brutal 2022 with declining valuations of stocks and a slowing of new drug approvals. However, the sector is poised to be back on track. In 2023, even if the United States enters a recession, the sector is expected to perform well as demand for its products is not affected by a recession.
Overall, innovation is likely to drive growth in the industry in 2023. M&A deals are also picking up, which shows growth. Among the large drugmakers, J&J (JNJ - Free Report) , Novo Nordisk (NVO - Free Report) , AstraZeneca (AZN - Free Report) ,Novartis (NVS - Free Report) and Sanofi (SNY - Free Report) are worth retaining in your portfolio.
Industry Description
The Zacks Large Cap Pharmaceuticalsindustry 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 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.The year 2023 has begun with some big acquisition announcements. Amgen’s offered to buy Horizon Therapeutics for$27.8 billion in December 2022.
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.
Macroeconomic Uncertainty: 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, major waves of variants of concern emerged quickly, became dominant and were superseded by the next variant. There is still uncertainty surrounding the emergence of new variants and continued global surges.
Higher interest rates, inflationary pressures from rising energy prices, significant economic volatility, supply chain pressure and the war in Europe are creating an uncertain macro environment and economic volatility.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Large Cap Pharmaceuticals industry is a 12-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 #106, which places it in the top 42% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 and the Zacks Medical Sector in the past year.
Stocks in this industry have collectively risen 6.0% in the past year compared with the Zacks S&P 500 composite’s decline of 8.0% and the Zacks Medical Sector’s fall of 13.2%.
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 16.37X compared with the S&P 500’s 17.92X and the Zacks Medical Sector's 21.99X.
Over the last five years, the industry has traded as high as 17.20X, as low as 13.31X and at a median of 14.93X, as the chart below shows.
Forward 12-Month Price-to-Earnings (P/E) Ratio
5 Large Drugmakers to Keep an Eye On
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 #1 (Strong Buy). Estimates for its 2023 earnings per share have increased from $4.15 to $4.43 over the past 60 days. Estimates for 2024 have jumped from $4.38 per share to $5.19 over the same timeframe. The stock has surged 35.2% in the past year.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: NVO
Sanofi: Sanofi’s Specialty Care unit is on a strong footing, particularly with the regular label expansion of Dupixent. Dupixent has become the key top-line driver for Sanofi. With outside U.S. revenues accelerating and multiple approvals for new indications, its sales are expected to be higher. Sanofi possesses a leading vaccine portfolio, which has become the primary top-line driver. Its R&D pipeline is strong. Several data readouts are expected in 2023. It has also launched several new drugs in the past couple of years and is expanding its pipeline through M&A deals. Sanofi has a Zacks Rank of 3.
Estimates for Sanofi’s 2024 earnings per share have increased from $4.79 per share to $4.89 in the past 60 days. The stock has lost 8.1% in the past year.
Price and Consensus: SNY
Novartis: Novartis has a strong and diverse portfolio. Solid momentum in key brands like Entresto, Kesimpta, Zolgensma, Kisqali and Leqvio is fueling growth, offsetting the impact of rising generic competition. 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. The planned spin-off of the Sandoz unit remains on track for the second half of 2023. The spin-off will allow Novartis to focus on its core pharma business.
The Zacks Consensus Estimate for 2023 EPS has risen from $6.45 per share to $6.50 while that for 2024 has jumped from $6.93 per share to $6.99 over the past 60 days.Novartis is a #3 Ranked stock. This Swiss drugmaker’s stock has risen 0.4% in the past year.
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 for 2023. 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. The Alexion buyout strengthened its immunology franchise, adding several drugs that are boosting its top line.
AstraZeneca has a Zacks Rank #3. The Zacks Consensus Estimate for this British drugmaker’s 2023 EPS has declined from $3.64 per share to $3.61 over the past 60 days while that for 2024 has decreased from $4.23 per share to $4.20. The stock has risen 5.3% in the past year.
Price and Consensus: AZN
Johnson & Johnson: J&J’s Pharma unit is performing above-market levels, supported by blockbuster drugs, Darzalex and Stelara, and contribution from newer drugs, Erleada and Tremfya. J&J is focusing on growing its MedTech unit through new products. J&J is making rapid progress with its pipeline and line extensions. It has taken meaningful steps to resolve its talc and opioid litigations.
J&J has a Zacks Rank #3. The Zacks Consensus Estimate for this large drugmaker’s 2023 EPS has risen from $10.29 per share to $10.50 over the past 60 days while that for 2024 has jumped from $10.79 per share to $10.94. The stock has declined 9.9% in the past year.
Price and Consensus: JNJ