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4 Large Drug Stocks Trying to Survive the Industry Challenges
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The fourth-quarter earnings season is in full swing for the drug and biotech sector. The performance of the large drugmakers that have reported so far has been 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 are some concerns 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 concerns. 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.
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 products, medical devices and consumer-related healthcare products.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 drugmakers.
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 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.Of late, areas like obesity and inflammatory bowel disease are attracting buyout interest. In a recent mega-merger deal, Pfizer bought Seagen for $43 billion. The transaction closed on Dec 14, 2023.
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: High interest rates, global supply chain constraints, pressure in the U.S. regional banking space and rising geopolitical concerns (Russia/Ukraine and Gaza/Israel wars) have increased broader economic concerns.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 #163, which places it in the bottom 35% of 251 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 22.2% in the past year compared with the Zacks S&P 500 composite’s increase of 17.1% and the Zacks Medical Sector’s increase of 1.6% in the said time frame.
Trailing 12M 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 19.05X compared with the S&P 500’s 20.19X and the Zacks Medical Sector's 22.91X.
Over the last five years, the industry has traded as high as 19.05X, as low as 13.31X and at a median of 15.03X, as the chart below shows.
4 Large Drugmakers to Watch
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. GLP-1 based treatments, Ozempic and Wegovy, are driving sales. The GLP-1 segment is an important class of drugs for multiple cardiometabolic diseases and is gaining significant popularity.
Wegovy has been witnessing increased demand trends in the United States. In the fourth quarter of 2023, Wegovy sales rose 311% at constant exchange rate. Label expansions of these drugs in cardiovascular and other indications will likely boost sales. Novo Nordisk has also significantly stepped up its M&A activity in the past two years.
Estimates for its 2024 earnings per share have increased from $3.20 to $3.32 over the past 60 days. The stock has surged 69.3% in the past year.
Price and Consensus: NVO
Eli Lilly: In 2023, Lilly saw new drugs generate impressive sales, received approvals for more new drugs and witnessed pipeline and regulatory success.
Mounjaro/tirzepatide, Lilly’s new dual GIP and GLP-1 receptor agonist (GIP/GLP-1 RA), which was approved for treating type II diabetes in May 2022, generated impressive sales of $2.96 billion in the first nine months of 2023, benefiting from strong demand trends. Tirzepatide was approved for obesity indication in the United States in November by the name of Zepbound. Mounjaro and Zepbound are expected to be key top-line drivers for Lilly in 2024, with demand for weight loss drugs rising rapidly.
Lilly gained approvals for some other new drugs in 2023 like Omvoh for ulcerative colitis and BTK inhibitor Jaypirca for mantle cell lymphoma and chronic lymphocytic leukemia. Lilly expects to file a regulatory application seeking approval for Omvoh/mirikizumab for its second IBD indication, Crohn's disease, in 2024. Lilly will file the U.S. regulatory application for donanemab for early Alzheimer’s disease in the first quarter of 2024 while an application is under review in the EU. Donanemab is an important asset in Lilly’s pipeline. All these potential new product launches are expected to drive the growth of the company.
Lilly also acquired a couple of clinical-stage biotechs in 2023 like POINT Biopharma, a maker of next-generation radioligand therapies for treating cancers, and DICE Therapeutics, a maker of IL-17 inhibitors to treat chronic diseases in immunology. The acquisitions strengthened its pipeline.
Lilly has a Zacks Rank #3 (Hold) currently.
The Zacks Consensus Estimate for Lilly’s 2024 EPS has declined from $12.57 per share to $12.50 over the past 60 days. The stock has risen 94.8% in the past year.
Price and Consensus: LLY
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.
Boosted by its new product launches, AbbVie expects to return to robust revenue growth in 2025 with a high single-digit CAGR till the end of the decade.
AbbVie has several promising R&D programs with the potential to drive long-term growth. This includes next generation approaches in immunology, a focus on bispecifics, ADCs as well as innovative therapies for neuropsychiatric and neurodegenerative disorders. In oncology, AbbVie also has an exciting and diverse pipeline of promising new therapies in both blood cancers and solid tumors.
AbbVie has a Zacks Rank #3. The Zacks Consensus Estimate for 2024 EPS has risen from $11.13 per share to $11.22 over the past 60 days. The stock has risen 15.5% in the past year.
Price and Consensus: ABBV
Novartis: The company’s performance in 2023 was decent and its efforts to restructure its business are encouraging. With the separation of Sandoz, it has become a pure-play pharmaceutical company. Drugs like Entresto, Kesimpta, Zolgensma, Kisqali and Leqvio continue to fuel growth and offset the impact of generic competition. The uptake of Pluvicto and Scemblix has been outstanding and should fuel top-line growth. Novartis is also looking to solidify its presence in the promising gene therapy space.
Novartis has a Zacks Rank #3. The Zacks Consensus Estimate for this Swiss drugmaker’s 2024 EPS has risen from $8.10 per share to $8.11 over the past 60 days. The stock has risen 22.7% in the past year.
Price and Consensus: NVS
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4 Large Drug Stocks Trying to Survive the Industry Challenges
The fourth-quarter earnings season is in full swing for the drug and biotech sector. The performance of the large drugmakers that have reported so far has been 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 are some concerns 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 concerns. 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.
Among the large drugmakers, Eli Lilly (LLY - Free Report) , Novo Nordisk (NVO - Free Report) , AbbVie (ABBV - Free Report) and Novartis (NVS - Free Report) are worth retaining in one’s 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 products, medical devices and consumer-related healthcare products.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 drugmakers.
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 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.Of late, areas like obesity and inflammatory bowel disease are attracting buyout interest. In a recent mega-merger deal, Pfizer bought Seagen for $43 billion. The transaction closed on Dec 14, 2023.
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: High interest rates, global supply chain constraints, pressure in the U.S. regional banking space and rising geopolitical concerns (Russia/Ukraine and Gaza/Israel wars) have increased broader economic concerns.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 #163, which places it in the bottom 35% of 251 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 22.2% in the past year compared with the Zacks S&P 500 composite’s increase of 17.1% and the Zacks Medical Sector’s increase of 1.6% in the said time frame.
Trailing 12M 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 19.05X compared with the S&P 500’s 20.19X and the Zacks Medical Sector's 22.91X.
Over the last five years, the industry has traded as high as 19.05X, as low as 13.31X and at a median of 15.03X, as the chart below shows.
4 Large Drugmakers to Watch
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. GLP-1 based treatments, Ozempic and Wegovy, are driving sales. The GLP-1 segment is an important class of drugs for multiple cardiometabolic diseases and is gaining significant popularity.
Wegovy has been witnessing increased demand trends in the United States. In the fourth quarter of 2023, Wegovy sales rose 311% at constant exchange rate. Label expansions of these drugs in cardiovascular and other indications will likely 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). You can see the complete list of today’s Zacks #1 Rank stocks here
Estimates for its 2024 earnings per share have increased from $3.20 to $3.32 over the past 60 days. The stock has surged 69.3% in the past year.
Price and Consensus: NVO
Eli Lilly: In 2023, Lilly saw new drugs generate impressive sales, received approvals for more new drugs and witnessed pipeline and regulatory success.
Mounjaro/tirzepatide, Lilly’s new dual GIP and GLP-1 receptor agonist (GIP/GLP-1 RA), which was approved for treating type II diabetes in May 2022, generated impressive sales of $2.96 billion in the first nine months of 2023, benefiting from strong demand trends. Tirzepatide was approved for obesity indication in the United States in November by the name of Zepbound. Mounjaro and Zepbound are expected to be key top-line drivers for Lilly in 2024, with demand for weight loss drugs rising rapidly.
Lilly gained approvals for some other new drugs in 2023 like Omvoh for ulcerative colitis and BTK inhibitor Jaypirca for mantle cell lymphoma and chronic lymphocytic leukemia. Lilly expects to file a regulatory application seeking approval for Omvoh/mirikizumab for its second IBD indication, Crohn's disease, in 2024. Lilly will file the U.S. regulatory application for donanemab for early Alzheimer’s disease in the first quarter of 2024 while an application is under review in the EU. Donanemab is an important asset in Lilly’s pipeline. All these potential new product launches are expected to drive the growth of the company.
Lilly also acquired a couple of clinical-stage biotechs in 2023 like POINT Biopharma, a maker of next-generation radioligand therapies for treating cancers, and DICE Therapeutics, a maker of IL-17 inhibitors to treat chronic diseases in immunology. The acquisitions strengthened its pipeline.
Lilly has a Zacks Rank #3 (Hold) currently.
The Zacks Consensus Estimate for Lilly’s 2024 EPS has declined from $12.57 per share to $12.50 over the past 60 days. The stock has risen 94.8% in the past year.
Price and Consensus: LLY
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.
Boosted by its new product launches, AbbVie expects to return to robust revenue growth in 2025 with a high single-digit CAGR till the end of the decade.
AbbVie has several promising R&D programs with the potential to drive long-term growth. This includes next generation approaches in immunology, a focus on bispecifics, ADCs as well as innovative therapies for neuropsychiatric and neurodegenerative disorders. In oncology, AbbVie also has an exciting and diverse pipeline of promising new therapies in both blood cancers and solid tumors.
AbbVie has a Zacks Rank #3. The Zacks Consensus Estimate for 2024 EPS has risen from $11.13 per share to $11.22 over the past 60 days. The stock has risen 15.5% in the past year.
Price and Consensus: ABBV
Novartis: The company’s performance in 2023 was decent and its efforts to restructure its business are encouraging. With the separation of Sandoz, it has become a pure-play pharmaceutical company. Drugs like Entresto, Kesimpta, Zolgensma, Kisqali and Leqvio continue to fuel growth and offset the impact of generic competition. The uptake of Pluvicto and Scemblix has been outstanding and should fuel top-line growth. Novartis is also looking to solidify its presence in the promising gene therapy space.
Novartis has a Zacks Rank #3. The Zacks Consensus Estimate for this Swiss drugmaker’s 2024 EPS has risen from $8.10 per share to $8.11 over the past 60 days. The stock has risen 22.7% in the past year.
Price and Consensus: NVS