The second-quarter earnings season was a rather good one for the large drugmakers, with most companies beating estimates for earnings and sales. Particularly a strong top-line performance attracted investor attention to the pharma sector. Driven by the better-than-expected performance in the first half, most companies also raised their guidance for 2023. After a pandemic-driven 2020 and 2021, the sector had a brutal 2022 with declining valuations of stocks and a slowdown in new drug approvals. However, the sector is now back on track. In 2023, new drug approvals and line extensions have picked up sharply. The FDA has already approved 35 new drugs so far in 2023 compared with 37 in the whole of 2022. M&A deals are also picking up, which shows growth. Overall, innovation is likely to drive growth in the industry with key spaces like weight-loss/obesity and Alzheimer’s disease drugs attracting attention. Among the large drugmakers,
Eli Lilly ( LLY Quick Quote LLY - Free Report) , J&J ( JNJ Quick Quote JNJ - Free Report) , Novo Nordisk ( NVO Quick Quote NVO - Free Report) , Novartis ( NVS Quick Quote NVS - Free Report) and AstraZeneca ( AZN Quick Quote AZN - Free Report) are worth retaining in your portfolio. Industry Description
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 other key features of large drug companies. What's Shaping the Future of the Large-Cap Pharma Industry?
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. Innovation and Pipeline Success: 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.Fast-growing and lucrative markets such as oncology, rare disease 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.Among some top deals of the first half, Pfizer has offered to buy Seagen for $43 billion. Merck closed the acquisition of Prometheus Biosciences for approximately $10.8 billion in June. The Pfizer/Seagen transaction is expected to be closed in late 2023 or early 2024. Aggressive M&A & Collaboration Activity: 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. Pipeline Setbacks & Other Headwinds:
: Rising inflation and interest rates, global supply chain constraints, recent bank failures and ongoing conflict between Russia and Ukraine have increased broader economic uncertainty. There is still uncertainty surrounding the emergence of new variants. Macroeconomic Uncertainty 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 #103, 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 underperformed the S&P 500 but outperformed the Zacks Medical Sector year to date.
Stocks in this industry have collectively risen 7.8% so far this year. The Zacks S&P 500 composite rose 15.1% in the said time frame, while the Zacks Medical Sector fell 4.6%.
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 18.24X compared with the S&P 500’s 18.98X and the Zacks Medical Sector's 22.04X.
Over the last five years, the industry has traded as high as 18.24X, as low as 13.31X and at a median of 15.05X, as the chart below shows.
Forward 12-Month Price-to-Earnings (P/E) Ratio
5 Large Drugmakers to Keep an Eye On
Johnson & Johnson: J&J’s Pharma unit is performing at above-market levels. Growth in 2023 is expected to be driven by existing products like Darzalex, Tremfya, Erleada, Invega Sustenna and Uptravi, and also continued uptake of new launches, including Spravato, Carvykti and Tecvayli. The MedTech unit is showing improving trends, driven by a recovery in surgical procedures and contribution from new products. J&J is making rapid progress with its pipeline and line extensions. J&J has also taken meaningful steps to resolve its talc and opioid litigation issues.
J&J has a Zacks Rank #2 (Buy).
The Zacks Consensus Estimate for this large drugmaker’s 2023 EPS has risen from $10.65 per share to $10.75 over the past 30 days while that for 2024 has jumped from $11.12 per share to $11.29. The stock has declined 2.9% year to date.
Price and Consensus: JNJ
Eli Lilly: Lilly boasts a solid portfolio of core drugs in diabetes, autoimmune diseases and cancer. Its revenue growth is being driven by higher demand for drugs like Verzenio, Trulicity, Taltz and others. Sales of its new diabetes drug, Mounjaro, approved in 2022, are already benefiting from strong demand trends. Mounjaro is expected to be a key long-term top-line driver for Lilly as it has the potential to be approved for obesity and other diabetes-related diseases. Mounjaro showed superior weight-loss reduction in clinical studies for obesity. With demand for weight loss drugs rising rapidly, better-than-expected sales of Mounjaro, which has shown promise in obesity studies, are attracting investor attention. Lilly expects regulatory decisions for some key pipeline candidates this year like Omvoh/mirikizumab, lebrikizumab, donanemab, among others. All these potential new product launches are expected to drive near-term growth for the company. Lilly has a Zacks Rank of 3 (Hold). The Zacks Consensus Estimate for Lilly’s 2023 EPS has risen from $8.78 per share to $9.59 over the past 30 days while that for 2024 has jumped from $12.12 per share to $13.02. The stock has lost 49.4% so far this year.
Price and Consensus: LLY Novo Nordisk: It 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, and Saxenda have been helping the company maintain momentum. Wegovy has been witnessing increased demand trends in the United States. 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. Estimates for its 2023 earnings per share have increased from $5.10 to $5.20 over the past 30 days. Estimates for 2024 have jumped from $5.96 per share to $6.02 over the same timeframe. The stock has surged 35.3% year to date.
Price and Consensus: NVO
Novartis: It 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. Pluvicto and Scemblix saw very strong launches. The pending acquisition of Chinook Therapeutics is expected to strengthen its renal pipeline. 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 $6.81 per share to $6.92 while that for 2024 has jumped from $7.32 per share to $7.48 over the past 30 days. Novartis is a #3 Ranked stock. This Swiss drugmaker’s stock has risen 11.3% so far this year. Price and Consensus: NVS
AstraZeneca: The company enjoys a diverse product portfolio and a global footprint. AstraZeneca’s key drugs like Lynparza, Tagrisso, Imfinzi, Fasenra and Farxiga should keep driving revenues. Almost all non-COVID therapy areas demonstrated double-digit revenue growth in the first half of 2023. AstraZeneca’s pipeline is strong with important 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.
AstraZeneca has a Zacks Rank #3. The Zacks Consensus Estimate for this British drugmaker’s 2023 EPS has declined from $3.66 per share to $3.65 over the past 30 days while that for 2024 has risen from $4.12 per share to $4.15. The stock has risen 1% so far this year.
Price and Consensus: AZN