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4 Large Drug Stocks Likely to Sail Through Industry Woes
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The third-quarter earnings season has just concluded for the drug and biotech sector. The performance of the large drugmakers was rather lukewarm, with most posting mixed results.
Higher tax rates due to changes in global tax regulations, concerns around the economy and inflation, regular pipeline setbacks and the slow ramp-up of newer drugs may hurt the stock prices of drug developers. Uncertainty about the impact of Medicare drug price negotiations and the Federal Trade Commission’s (FTC) scrutiny of M&A deals in the sector remain overhangs. Nonetheless, innovation is likely to drive growth in the industry, with key spaces like weight loss/obesity and Alzheimer’s disease drugs attracting attention. M&A activity also remains strong, which shows growth.
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 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?
Innovation and Pipeline Success: For big drugmakers, an innovative pipeline is a competitive necessity and key to top-line growth. Pharma companies are constantly striving to ramp up innovation and spend 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 of dollars 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. Of late, areas like obesity and inflammatory bowel disease are attracting buyout interest. Among some top deals of the year, Pfizer has offered to buy Seagen for $43 billion. The transaction is expected to be closed in late 2023 or early 2024.
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, the slowdown in sales of some of the most high-profile older drugs, Medicare drug price negotiations and increasing FTC scrutiny of M&A deals.
Macroeconomic Uncertainty: Rising inflation and interest rates, global supply chain constraints, recent bank failures and the ongoing conflict between Russia and Ukraine have increased broader economic uncertainty. There is still uncertainty surrounding the emergence of new variants of COVID.
Zacks Industry Rank Indicates a Gloomy Outlook
The Zacks Large Cap Pharmaceuticals industry is an 11-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 #193, which places it in the bottom 23% of 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 10.6% so far this year compared with the Zacks S&P 500 composite’s increase of 12.3%. However, the Zacks Medical Sector has declined 9% 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 17.64X compared with the S&P 500’s 18.74X and the Zacks Medical Sector's 21.38X.
Over the last five years, the industry has traded as high as 18.10X, 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
4 Large Drugmakers Trying to Survive the Industry Challenges
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 injection 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.
Estimates for its 2023 earnings per share have increased from $2.51 to $2.62 over the past 30 days. Estimates for 2024 have jumped from $2.95 per share to $3.07 over the same timeframe. The stock has surged 49.5% year to date.
Price and Consensus: NVO
Eli Lilly: It 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. Mounjaro was approved for the obesity indication in the United States in November. Mounjaro will be marketed by the name of Zepbound for chronic weight management. Another important medicine, Omvoh/mirikizumab was approved for ulcerative colitis in the United States and Europe this year.
Lilly expects regulatory decisions for some key pipeline candidates this year or early next year, like Omvoh/mirikizumab for Crohn's disease, Jaypirca/pirtobrutinib for chronic lymphocytic leukemiaand donanemab, among others. All these potential new product launches are expected to drive near-term growth for the company. Lilly has a Zacks Rank #3 (Hold).
The Zacks Consensus Estimate for Lilly’s 2023 EPS has declined from $8.43 per share to $6.62 over the past 30 days, while that for 2024 has declined from $13.18 per share to $12.63. The stock has risen 63.4% so far this year.
Price and Consensus: LLY
Johnson & Johnson: With the complete separation of the Consumer Health segment into a new listed company called Kenvue, J&J has now become a two-sector company focused on the Pharmaceutical and MedTech fields. Kenvue now operates as a separate and fully independent company.
J&J’s Pharma unit is performing at above-market levels. Growth in 2023 is being 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 #3. The Zacks Consensus Estimate for this large drugmaker’s 2023 EPS has risen from $10.03 per share to $10.10 over the past 30 days. The stock has declined 16.6% year to date.
Price and Consensus: JNJ
AbbVie: The company has several new drugs in its portfolio with the potential to drive the top line and make up for lost revenues from its blockbuster medicine, Humira, which lost patent exclusivity in the United States in 2023. Newer immunology medicines, Skyrizi and Rinvoq, are performing extremely well, bolstered by approval in new indications, which should support top-line growth in the next few years. Skyrizi and Rinvoq are expected to collectively exceed the peak revenues achieved by Humira by 2027. AbbVie expects combined sales (risk-adjusted) of Skyrizi and Rinvoq to be more than $17.5 billion by 2025 and more than $21 billion by 2027.
The company has several early/mid-stage candidates that have the potential to drive long-term growth. Though revenues are expected to decline in 2023, AbbVie expects to return to robust sales growth in 2025 with a high single-digit CAGR growth till the end of the decade.
AbbVie has a Zacks Rank #3. The Zacks Consensus Estimate for 2023 EPS has risen from $11.03 per share to $11.19 over the past 30 days, while that for 2024 has risen from $11.04 per share to $11.11. The stock has declined 14.2% so far this year.
Price and Consensus: ABBV
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4 Large Drug Stocks Likely to Sail Through Industry Woes
The third-quarter earnings season has just concluded for the drug and biotech sector. The performance of the large drugmakers was rather lukewarm, with most posting mixed results.
Higher tax rates due to changes in global tax regulations, concerns around the economy and inflation, regular pipeline setbacks and the slow ramp-up of newer drugs may hurt the stock prices of drug developers. Uncertainty about the impact of Medicare drug price negotiations and the Federal Trade Commission’s (FTC) scrutiny of M&A deals in the sector remain overhangs. Nonetheless, innovation is likely to drive growth in the industry, with key spaces like weight loss/obesity and Alzheimer’s disease drugs attracting attention. M&A activity also remains strong, which shows growth.
Among the large drugmakers, Eli Lilly (LLY - Free Report) , Novo Nordisk (NVO - Free Report) , J&J (JNJ - Free Report) and AbbVie (ABBV - Free Report) are worth retaining in your portfolio.
Industry Description
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 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?
Innovation and Pipeline Success: For big drugmakers, an innovative pipeline is a competitive necessity and key to top-line growth. Pharma companies are constantly striving to ramp up innovation and spend 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 of dollars 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. Of late, areas like obesity and inflammatory bowel disease are attracting buyout interest. Among some top deals of the year, Pfizer has offered to buy Seagen for $43 billion. The transaction is expected to be closed in late 2023 or early 2024.
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, the slowdown in sales of some of the most high-profile older drugs, Medicare drug price negotiations and increasing FTC scrutiny of M&A deals.
Macroeconomic Uncertainty: Rising inflation and interest rates, global supply chain constraints, recent bank failures and the ongoing conflict between Russia and Ukraine have increased broader economic uncertainty. There is still uncertainty surrounding the emergence of new variants of COVID.
Zacks Industry Rank Indicates a Gloomy Outlook
The Zacks Large Cap Pharmaceuticals industry is an 11-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 #193, which places it in the bottom 23% of 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 10.6% so far this year compared with the Zacks S&P 500 composite’s increase of 12.3%. However, the Zacks Medical Sector has declined 9% 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 17.64X compared with the S&P 500’s 18.74X and the Zacks Medical Sector's 21.38X.
Over the last five years, the industry has traded as high as 18.10X, 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
4 Large Drugmakers Trying to Survive the Industry Challenges
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 injection 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 #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Estimates for its 2023 earnings per share have increased from $2.51 to $2.62 over the past 30 days. Estimates for 2024 have jumped from $2.95 per share to $3.07 over the same timeframe. The stock has surged 49.5% year to date.
Price and Consensus: NVO
Eli Lilly: It 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. Mounjaro was approved for the obesity indication in the United States in November. Mounjaro will be marketed by the name of Zepbound for chronic weight management. Another important medicine, Omvoh/mirikizumab was approved for ulcerative colitis in the United States and Europe this year.
Lilly expects regulatory decisions for some key pipeline candidates this year or early next year, like Omvoh/mirikizumab for Crohn's disease, Jaypirca/pirtobrutinib for chronic lymphocytic leukemiaand donanemab, among others. All these potential new product launches are expected to drive near-term growth for the company. Lilly has a Zacks Rank #3 (Hold).
The Zacks Consensus Estimate for Lilly’s 2023 EPS has declined from $8.43 per share to $6.62 over the past 30 days, while that for 2024 has declined from $13.18 per share to $12.63. The stock has risen 63.4% so far this year.
Price and Consensus: LLY
Johnson & Johnson: With the complete separation of the Consumer Health segment into a new listed company called Kenvue, J&J has now become a two-sector company focused on the Pharmaceutical and MedTech fields. Kenvue now operates as a separate and fully independent company.
J&J’s Pharma unit is performing at above-market levels. Growth in 2023 is being 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 #3. The Zacks Consensus Estimate for this large drugmaker’s 2023 EPS has risen from $10.03 per share to $10.10 over the past 30 days. The stock has declined 16.6% year to date.
Price and Consensus: JNJ
AbbVie: The company has several new drugs in its portfolio with the potential to drive the top line and make up for lost revenues from its blockbuster medicine, Humira, which lost patent exclusivity in the United States in 2023. Newer immunology medicines, Skyrizi and Rinvoq, are performing extremely well, bolstered by approval in new indications, which should support top-line growth in the next few years. Skyrizi and Rinvoq are expected to collectively exceed the peak revenues achieved by Humira by 2027. AbbVie expects combined sales (risk-adjusted) of Skyrizi and Rinvoq to be more than $17.5 billion by 2025 and more than $21 billion by 2027.
The company has several early/mid-stage candidates that have the potential to drive long-term growth. Though revenues are expected to decline in 2023, AbbVie expects to return to robust sales growth in 2025 with a high single-digit CAGR growth till the end of the decade.
AbbVie has a Zacks Rank #3. The Zacks Consensus Estimate for 2023 EPS has risen from $11.03 per share to $11.19 over the past 30 days, while that for 2024 has risen from $11.04 per share to $11.11. The stock has declined 14.2% so far this year.
Price and Consensus: ABBV