The drug and biotech industry is showing some promising trends in 2024, driven by an increase in mergers and acquisitions (M&A) and positive pipeline news. Large drugmakers have several robust revenue streams and are mostly profitable companies, which makes them safe havens for investments. Innovation is the key to the growth of the industry. Innovation in the industry is at its peak, with spaces like weight loss/obesity, inflammation and Alzheimer’s disease attracting investor interest. M&A activity also remains strong.
However, concerns around the economy, regular pipeline setbacks and generic/biosimilar competition for blockbuster drugs are some headwinds faced by 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.
Among the large drugmakers, Eli Lilly LLY, Novo Nordisk NVO, Merck MRK and Pfizer PFE 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 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 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, 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 in 2024 already. Some of the larger ones are Eli Lilly’s offer to buy Morphic, Novo Nordisk’s offer to buy Catalent and Vertex’s buyout of Alpine Immune Sciences.
Pipeline Setbacks & Other Headwinds: 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, 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, 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 Bright Outlook
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 #106, which places it in the top 42% 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 as well as the S&P 500 so far this year.
Stocks in this industry have collectively risen 24.2% year to date compared with the Zacks S&P 500 composite’s increase of 18.2% and the Zacks Medical Sector’s increase of 6.2% in the said time frame.
YTD Price Performance
Industry's Current Valuation Based on the forward 12-month
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 20.71X compared with the S&P 500’s 22.01X and the Zacks Medical Sector's 23.73X.
Over the last five years, the industry has traded as high as 20.71X, 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 to Watch
Merck: Its key cancer drug Keytruda and HPV vaccine Gardasilhave been driving sales. Keytruda alone accounts for around 45% of the company’s pharmaceutical sales. Keytruda has played an instrumental role in driving Merck’s revenue growth in the past few years. Though Keytruda will lose patent exclusivity in 2028, its sales are expected to remain strong until then. 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.
Merck made meaningful regulatory and clinical progress this year across areas like oncology (mainly Keytruda), vaccines and infectious diseases while also executing strategic business moves like the acquisition of Harpoon Therapeutics.
Animal health and vaccine products are its core growth drivers. Merck also has some key new products lined up for launch. Among these, Capvaxive (21-valent pneumococcal conjugate vaccine)and Winrevair (pulmonary arterial hypertension), both approved in the United States this year, have the potential to generate significant revenues for Merck over the long term.
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 #2 (Buy) currently. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here
The Zacks Consensus Estimate for Merck’s 2024 EPS has declined from $8.66 to $8.63 over the past 60 days. The stock has risen 17.5% so far this year.
Price and Consensus: MRK
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).
Estimates for its 2024 earnings per share have risen from $3.42 to $3.43 over the past 60 days. The stock has surged 36.6% year to date.
Price and Consensus: NVO
Eli Lilly: The company has seen unparalleled success with tirzepatide, a dual GIP and GLP-1 receptor agonist, which is marketed as Mounjaro for type II diabetes and Zepbound for obesity.
Mounjaro was launched in mid-2022, while Zepbound was launched in November 2023. Despite a short time on the market, Mounjaro and Zepbound have become key top-line drivers for Lilly, with demand for weight loss drugs rising rapidly. Tirzepatide is also being developed for other indications, including obstructive sleep apnea (OSA) and metabolic dysfunction-associated steatohepatitis. Recent data from clinical studies on OSA have shown that tirzepatide has reduced sleep apnea events in people with obesity.
Other than Mounjaro and Zepbound, Lilly gained approvals for some other new drugs in the past year. These included Omvoh for ulcerative colitis and BTK inhibitor Jaypirca for mantle cell lymphoma and chronic lymphocytic leukemia. Lilly expects its new drugs, Mounjaro, Omvoh, Zepbound, Ebglyss and Jaypirca, to contribute significantly to its top line in 2024. The FDA’s approval of the Alzheimer's disease drug Kisunla (donanemab) earlier this month was a huge boost. Lilly expects Kisunla to generate blockbuster sales. Earlier this month, Lilly also announced a definitive agreement to acquire small biotech Morphic Therapeutics, which will strengthen its pipeline in immunology, a core area for the company.
Eli Lilly has a Zacks Rank #3 currently.
The Zacks Consensus Estimate for Lilly’s 2024 EPS has risen from $13.37 to $13.61 over the past 60 days. The stock has risen 63.0% year to date.
Price and Consensus: LLY
Pfizer: Its revenues are declining due to a steep drop in revenues from its COVID-19 products. However, Pfizer expects better non-COVID operational revenue growth in the future quarters, driven by its key drugs like Prevnar, Vyndaqel and Eliquis, new launches like Abrysvo, Velsipity, Penbraya, newly acquired products like Nurtec, as well as those acquired from the acquisition of Seagen in December last year.
Pfizer is also working on expanding the labels of approved products like Padcev, Adcetris, Litfulo, Velsipity and Elrexfio, among others.
Pfizer’s new products, newly acquired products, including those acquired from Seagen, and a robust cancer pipeline position it strongly for operational growth in 2025 and beyond. Huge profits from its COVID products strengthened its cash position. The funds are being used to make acquisitions, increase dividends, buy back shares and reduce debt.
Pfizer is a #3 Ranked stock. The Zacks Consensus Estimate for 2024 EPS has risen from $2.36 to $2.39 over the past 60 days. The stock has risen 1% so far this year.
Price and Consensus: PFE
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