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After a rather weak 2023, the drug and biotech sector made a comeback initially in 2024 amid a slew of takeover deals. However, the sector has slowed down thereafter, mostly due to macroeconomic pressure.
Concerns around the economy and inflation, regular pipeline setbacks and generic/biosimilar competition for blockbuster drugs are some headwinds 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, large drugmakers have several robust revenue streams and are mostly profitable companies. This makes them safe havens for investments. Innovation is the key to the growth of the industry, with spaces like weight loss/obesity and Alzheimer's disease lately attracting attention. M&A activity also remains strong.
Among the large drugmakers, Eli Lilly, Novo Nordisk, Merck and AbbVie are worth retaining in one's 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 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 drug companies
What is 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. There has been a slew of M&A announcements already in 2024, some larger ones being Novo Nordisk's offer to buy Catalent and Vertex's buyout offer for Alpine Immune Sciences.
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: Concerns around U.S. economic growth due to sticky inflation, chances of higher interest rates for longer than expected, likely pressure in the U.S. regional banking space and escalating geopolitical tensions (the Russia-Ukraine and Gaza-Israel conflicts) leading to adverse impact on global supply chains have lately increased broader economic woes.
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 #224, which places it in the bottom 11% 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 outperformed the Zacks Medical Sector but underperformed the S&P 500 in the past year.
Stocks in this industry have collectively risen 14.5% in the past year compared with the Zacks S&P 500 composite's increase of 21.9% and the Zacks Medical Sector's decrease of 3.3% in the said time frame.
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 19.26X compared with the S&P 500's 20.30X and the Zacks Medical Sector's 22.29X.
Over the last five years, the industry has traded as high as 20.24X, as low as 13.31X and at a median of 15.05X.
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.
Despite supply challenges, Wegovy is seeing strong prescription trends and is generating impressive revenues and profits for Novo Nordisk. Label expansions of these drugs in cardiovascular and other indications will likely boost sales. Wegovy was approved by the FDA for lowering the risk of serious heart problems in obese/overweight adults in March. Novo Nordisk has also significantly stepped up its M&A activity in the past two years.
Estimates for its 2024 earnings per share are stable at $3.32 over the past 60 days. The stock has surged 52.5% in the past year.
Eli Lilly: Its revenue growth is being driven by higher demand for drugs like Mounjaro, Verzenio, Jardiance Taltz and others. Lilly's new tirzepatide medicines, diabetes drug Mounjaro and newly launched weight loss medicine, Zepbound, are expected to be key top-line drivers for some time, with demand for weight loss drugs rising rapidly. Zepbound was approved in November 2023 and launched in December. Mounjaro was approved in May 2022 for treating type II diabetes and generated impressive sales of $3.86 billion in 2023. Zepbound generated sales of $175.8 million in 2023.
Lilly has also launched some other new products recently like Omvoh and Jaypirca. Lilly expects its new drugs, Mounjaro, Omvoh, Zepbound, Ebglyss and Jaypirca, to contribute significantly to its top line in 2024. Label expansion studies are also going on to allow expansion of the eligible patient populations for these drugs in the future.Lilly is also making rapid pipeline progress in areas like obesity, diabetes and Alzheimer's.
Lilly has a Zacks Rank #3 currently.
The Zacks Consensus Estimate for Lilly's 2024 EPS has risen from $12.40 per share to $12.52 over the past 60 days. The stock has risen 93.8% in the past year.
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. 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, antibody drug conjugates or 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 is a #3 Ranked stock. The Zacks Consensus Estimate for 2024 EPS has declined from $11.13 per share to $11.12 over the past 60 days. The stock has risen 2.9% in the past year.
Merck: Its key cancer drug Keytruda and HPV vaccine Gardasilhave been driving sales. Keytruda alone accounts for around 42% of the company's pharmaceutical sales. Keytruda has played an instrumental role in driving Merck's steady revenue growth in the past few years. With continued label expansion into new indications, particularly earlier-stage launches, Keytruda is expected to see continued growth.
Merck is also working on different strategies to drive the long-term growth of Keytruda. These include innovative immuno-oncology combinations, including Keytruda with TIGIT, LAG3 and CTLA-4 inhibitors.
Animal health and vaccine products are core growth drivers. Merck also has some key new products lined up for launch. Between 2025 and 2030, Merck expects eight potential new product approvals. We believe that among these, V116 and Winrevair have the potential to generate significant revenues for Merck over the long term. Winrevair (sotatercept) was approved for pulmonary arterial hypertension in March 2024. V116 is Merck's 21-valent pneumococcal conjugate vaccine, which is under priority review in the United States, with an FDA decision scheduled for Jun 17, 2024.
Merck boasts a strong cancer pipeline, including Keytruda, which should drive long-term growth. Merck is investing in M&A activity to strengthen its pipeline.
Merck has a Zacks Rank #3 currently. The Zacks Consensus Estimate for Merck's 2024 EPS has risen from $8.53 per share to $8.59 over the past 60 days. The stock has risen 8.9% in the past year.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +7.0 average gain per year. Amazingly, they soared with average gains of +44.9%, +48.4% and +55.2% per year.
Today you can access their live picks without cost or obligation.
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights Eli Lilly, Novo Nordisk, Merck and AbbVie
For Immediate Release
Chicago, IL – April 25, 2024 – Today, Zacks Equity Research discusses Eli Lilly (LLY - Free Report) , Novo Nordisk (NVO - Free Report) , Merck (MRK - Free Report) and AbbVie (ABBV - Free Report) .
Industry: Big Pharma
Link: https://www.zacks.com/commentary/2260758/4-large-drug-stocks-to-hold-on-to-amid-industry-challenges
After a rather weak 2023, the drug and biotech sector made a comeback initially in 2024 amid a slew of takeover deals. However, the sector has slowed down thereafter, mostly due to macroeconomic pressure.
Concerns around the economy and inflation, regular pipeline setbacks and generic/biosimilar competition for blockbuster drugs are some headwinds 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, large drugmakers have several robust revenue streams and are mostly profitable companies. This makes them safe havens for investments. Innovation is the key to the growth of the industry, with spaces like weight loss/obesity and Alzheimer's disease lately attracting attention. M&A activity also remains strong.
Among the large drugmakers, Eli Lilly, Novo Nordisk, Merck and AbbVie are worth retaining in one's 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 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 drug companies
What is 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. There has been a slew of M&A announcements already in 2024, some larger ones being Novo Nordisk's offer to buy Catalent and Vertex's buyout offer for Alpine Immune Sciences.
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: Concerns around U.S. economic growth due to sticky inflation, chances of higher interest rates for longer than expected, likely pressure in the U.S. regional banking space and escalating geopolitical tensions (the Russia-Ukraine and Gaza-Israel conflicts) leading to adverse impact on global supply chains have lately increased broader economic woes.
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 #224, which places it in the bottom 11% 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 outperformed the Zacks Medical Sector but underperformed the S&P 500 in the past year.
Stocks in this industry have collectively risen 14.5% in the past year compared with the Zacks S&P 500 composite's increase of 21.9% and the Zacks Medical Sector's decrease of 3.3% in the said time frame.
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 19.26X compared with the S&P 500's 20.30X and the Zacks Medical Sector's 22.29X.
Over the last five years, the industry has traded as high as 20.24X, as low as 13.31X and at a median of 15.05X.
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.
Despite supply challenges, Wegovy is seeing strong prescription trends and is generating impressive revenues and profits for Novo Nordisk. Label expansions of these drugs in cardiovascular and other indications will likely boost sales. Wegovy was approved by the FDA for lowering the risk of serious heart problems in obese/overweight adults in March. Novo Nordisk has also significantly stepped up its M&A activity in the past two years.
Novo Nordisk has a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here
Estimates for its 2024 earnings per share are stable at $3.32 over the past 60 days. The stock has surged 52.5% in the past year.
Eli Lilly: Its revenue growth is being driven by higher demand for drugs like Mounjaro, Verzenio, Jardiance Taltz and others. Lilly's new tirzepatide medicines, diabetes drug Mounjaro and newly launched weight loss medicine, Zepbound, are expected to be key top-line drivers for some time, with demand for weight loss drugs rising rapidly. Zepbound was approved in November 2023 and launched in December. Mounjaro was approved in May 2022 for treating type II diabetes and generated impressive sales of $3.86 billion in 2023. Zepbound generated sales of $175.8 million in 2023.
Lilly has also launched some other new products recently like Omvoh and Jaypirca. Lilly expects its new drugs, Mounjaro, Omvoh, Zepbound, Ebglyss and Jaypirca, to contribute significantly to its top line in 2024. Label expansion studies are also going on to allow expansion of the eligible patient populations for these drugs in the future.Lilly is also making rapid pipeline progress in areas like obesity, diabetes and Alzheimer's.
Lilly has a Zacks Rank #3 currently.
The Zacks Consensus Estimate for Lilly's 2024 EPS has risen from $12.40 per share to $12.52 over the past 60 days. The stock has risen 93.8% in the past year.
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. 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, antibody drug conjugates or 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 is a #3 Ranked stock. The Zacks Consensus Estimate for 2024 EPS has declined from $11.13 per share to $11.12 over the past 60 days. The stock has risen 2.9% in the past year.
Merck: Its key cancer drug Keytruda and HPV vaccine Gardasilhave been driving sales. Keytruda alone accounts for around 42% of the company's pharmaceutical sales. Keytruda has played an instrumental role in driving Merck's steady revenue growth in the past few years. With continued label expansion into new indications, particularly earlier-stage launches, Keytruda is expected to see continued growth.
Merck is also working on different strategies to drive the long-term growth of Keytruda. These include innovative immuno-oncology combinations, including Keytruda with TIGIT, LAG3 and CTLA-4 inhibitors.
Animal health and vaccine products are core growth drivers. Merck also has some key new products lined up for launch. Between 2025 and 2030, Merck expects eight potential new product approvals. We believe that among these, V116 and Winrevair have the potential to generate significant revenues for Merck over the long term. Winrevair (sotatercept) was approved for pulmonary arterial hypertension in March 2024. V116 is Merck's 21-valent pneumococcal conjugate vaccine, which is under priority review in the United States, with an FDA decision scheduled for Jun 17, 2024.
Merck boasts a strong cancer pipeline, including Keytruda, which should drive long-term growth. Merck is investing in M&A activity to strengthen its pipeline.
Merck has a Zacks Rank #3 currently. The Zacks Consensus Estimate for Merck's 2024 EPS has risen from $8.53 per share to $8.59 over the past 60 days. The stock has risen 8.9% in the past year.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +7.0 average gain per year. Amazingly, they soared with average gains of +44.9%, +48.4% and +55.2% per year.
Today you can access their live picks without cost or obligation.
See Stocks Free >>
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.