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 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, Merck, AbbVie, Lilly, J&J, Novartis and AstraZeneca 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, and 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 this industry’s growth. A faster drug approval process and the proposed removal of outdated regulations, which escalate costs and slow down innovation, are the other positives.
- There has been a flurry of M&A deal announcements this year in the biotech/drug industry. Apart from the two mega-merger announcements of Bristol-Myers-Celgene and AbbVie-Allergan, smaller biotech research firms, investigating new therapies or interesting pipeline candidates, garnered attention of bigger players this year. Oncology and gene therapy have mainly been the focus areas for M&A activities. Big pharma companies are cash rich, especially after the tax overhaul in 2017, which reduced the tax rate. 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 may prefer to 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.
- 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.
Overall, we believe that pipeline success, cost-cutting measures, share buybacks, product launches, ramped up M&A and collaboration activities and appropriate utilization of cash should keep the sector afloat, going forward.
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 stock-market performance and its current valuation.
Industry Underperforms S&P 500, Outperforms Sector
The Zacks Large Cap Pharmaceuticals industryis a 14-stock group within the broader Medical sector. It has underperformed the S&P 500 but outperformed the Zacks Medical Sector on a year-to-date basis.
While the stocks in this industry have collectively risen 6.4% year to date, the Zacks S&P 500 composite and the Zacks Medical Sector have increased 24% and 5.1%, 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 14.93X compared with the S&P 500’s 18.12X and the Zacks Medical sector's 20.65X.
Over the last five years, the industry has traded as high as 18.10X, as low as 13.94X and at a median of 15.56X 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 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 innovative and important therapeutic areas, 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.
In the Large Cap Pharmaceuticals universe, five companies have a Zacks Rank #2 (Buy). 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.
Roche Holding AG (RHHBY - Free Report) : Shares of this Swiss drugmaker have gained 23.6% this year so far. The Zacks Consensus Estimate for current-year EPS has been revised 1.2% upward over the past 60 days.
Price and Consensus: RHHBY
Bristol Myers (BMY - Free Report) : Shares of this New York baseddrugmaker have gained 10.4% this year so far. The Zacks Consensus Estimate for current-year EPS has been revised 2.1% upward over the past 60 days.
Price and Consensus: BMY
Merck & Co., Inc. (MRK - Free Report) : The Zacks Consensus Estimate for this Kenilworth, NJ -based drugmaker’s current-year EPS has increased 4.9% over the past 60 days. The stock has risen 13.9% so far this year.
Price and Consensus: MRK
GlaxoSmithKline (GSK - Free Report) : The stock of this British drugmaker has moved 17.5% upward year to date. The Zacks Consensus Estimate for this company’s current fiscal EPS has increased 4.1% over the past 60 days.
Price and Consensus: GSK
Pfizer, Inc. (PFE - Free Report) : This New York based drug giant has seen a 12.3% decline in share price so far this year. However, the Zacks Consensus Estimate for this stock's current-year EPS has increased 5.7% over the past 60 days.
Price and Consensus: PFE