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 such as 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.
Some of the prominent stocks in this industry are Pfizer (PFE - Free Report) , Merck, AbbVie, Lilly, J&J (JNJ - Free Report) , Novartis (NVS - Free Report) and AstraZeneca (AZN - Free Report) among others.
Here are the industry’s three major themes:
- Demand-driven growth in sales of new products, successful innovation and product line extensions in important therapeutic areas, strong clinical study results, frequent FDA approvals, continued strong performance of key products, growing demand for drugs, especially for rare-to-treat diseases, an aging population and increased health care spending are some of the factors boosting growth. A faster drug approval process and the proposed removal of outdated regulations, which escalate costs and slow down innovation, are the other positives.
- 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, sloppy sales of mature drugs, dwindling in-house pipelines, government scrutiny of drug prices and emergence of big tech firms like Apple and Google in the healthcare industry whet the M&A appetite of large drugmakers. However, after a flurry of deals in 2019, M&A activity relatively slowed down in 2020, mainly due to the impact of the coronavirus pandemic.
- Headwinds for the industry include government scrutiny of high drug prices, pricing and competitive pressure, generic competition for blockbuster treatments, slowdown in sales of some of the most high-profile older drugs and most importantly major pipeline setbacks.
The pharma and biotech sector has not been spared of the global market sell-off due to the coronavirus pandemic. There is a concern about supply chain disruptions, caused by the outbreak, hurting drug/biotech companies’ first-half earnings. Also, with half of the world under a lockdown, a delay is expected in completion of clinical studies and regulatory reviews, which could further delay drug approvals and their launch. However, all eyes are on the industry in the hope of a cure. The outbreak may bring in new appreciation for the industry as several drug/biotech companies are working on making new antibodies, drugs and vaccines to combat the disease.
Zacks Industry Rank Indicates Solid Prospects
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 #33, which places it in the top 13% 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 Outperforms S&P 500 &Sector
The Zacks Large Cap Pharmaceuticals industry is a 15-stock group within the broader Medical sector. It has outperformed the S&P 500 as well as the Zacks Medical Sector on a year-to-date basis.
While the stocks in this industry have collectively declined 7.9% year to date, the Zacks S&P 500 composite and the Zacks Medical Sector have declined 17.2% and 12.5%, respectively.
Year-to-Date Price Performance
Industry’s Current Valuation
On the basis of the forward 12-month price-to-earnings (P/E), a commonly used multiple for valuing large pharma companies, the industry is currently trading at 13.55X compared with the S&P 500’s 16.91X and the Zacks Medical sector's 18.98X.
Over the last five years, the industry has traded as high as 18.12X, as low as 13.04X and at a median of 15.8X as the chart below shows.
Forward 12 Month Price-to-Earnings (P/E) Ratio
In order to succeed in a changing global market and evolving healthcare landscape, pharmaceutical companies need to adopt innovative business models, invest in new technologies, raise investments in personalized medicines and seek external partners and collaborators for complementary strengths.
The sector may face some volatility due to the coronavirus pandemic, drug pricing issue, pricing/re-imbursement pressure, stiff competition, sluggish legacy product sales, loss of patent exclusivity of some key drugs and pipeline related setbacks. However, pipeline success in innovation, cost control, share repurchases, product introductions, heightened M&A activity and appropriate utilization of cash should put the sector on a firm footing in 2020, once the pandemic-related uncertainty subsides.
In the Large Cap Pharmaceuticals universe, one company has a Zacks Rank #1 (Strong Buy) while one company has a Zacks Rank #2 (Buy) and the rest carry a Zacks Rank of 3 (Hold). Most of these have witnessed positive earnings estimate revisions in the past 60 days.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Eli Lilly & Company (LLY - Free Report) : Shares of this Indianapolis, IN based drugmaker have gained 8% this year so far. The Zacks Consensus Estimate for current-year EPS has been revised 0.1% upward over the past 60 days. Lilly has a Zacks Rank #1.
Price and Consensus: LLY
AbbVie (ABBV - Free Report) : Shares of this North Chicago, IL based drugmaker have declined 14.9% this year so far. The Zacks Consensus Estimate for current-year EPS has been revised 1.4% upward over the past 60 days. AbbVie has a Zacks Rank #2.
Price and Consensus: ABBV
Merck & Co., Inc. (MRK - Free Report) : The Zacks Consensus Estimate for this Kenilworth, NJ -based drugmaker’s current-year EPS has remained stable over the past 60 days. The stock has declined 13.7% so far this year. Merck has a Zacks Rank #3.
Price and Consensus: MRK