Third-quarter earnings performance of the big drugmakers has mostly been better than expected. J&J JNJ, Bristol-Myers Merck, Novartis, Pfizer PFE, AstraZeneca, AbbVie ABBV beat estimates for both earnings and sales. Lilly and Sanofi beat the Zacks Consensus Estimate for earnings but missed the same for sales. Allergan met estimates for earnings while beating the same for sales.
Overall, new drugs and label expansions of blockbuster drugs drove the top line of most of the big shots backed by higher demand, which countered headwinds from generic/biosimilar competition for older medicines. However, greater pricing pressure in the United States increased competition and negative currency impacts hurt the top line. Importantly, the better-than-expected results coupled with an optimistic outlook for the fourth quarter led most of the companies to raise financial guidance for the year, buoying investor optimism.
The Zacks Large Cap Pharmaceuticals industry, comprising some of the biggest drugmakers in the world, has risen 4.7% since Oct 15, after J&J reported its earnings results – the first for the big pharma sector. Please note that the sector was down 0.8% from Jan 1 till Oct 14. This clearly indicates how the solid third-quarter performance gave an impetus to stocks in this industry.
Moreover, the industry belongs in the top 30% of the 254 Zacks-ranked industries and there are many stocks in the industry, which can boost investors’ portfolio.
The sector faces headwinds like 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.
Nonetheless, we believe increase in product sales backed by rising demand, pipeline success, frequent FDA approvals (35 new drugs approved so far in 2019), cost cutting, share buybacks, product launches, higher M&A and collaboration activity and appropriate utilization of cash will boost the sector.
In this scenario, investing in stocks with a large market cap is a prudent move, given the fact that they control a large portion of the industry.
Here we have highlighted four bigshot drugmakers, which may prove to be good buys. These Zacks Rank #2 (Buy) stocks have outperformed the industry so far this year and witnessed positive estimate revisions in the past 60 days.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
A chart showing the share price movement of the four stocks and the Large Cap Pharmaceuticals industry this year so far is given below.
4 Stocks to Buy
Shares of Merck have risen 10.7% this year so far. Earnings estimates for 2019 and 2020 have risen 5.1% and 1.9%, respectively over the past 60 days.
A significant part of Merck’s outperformance this year so far has been driven by its PD-1 inhibitor, Keytruda, and positive regulatory updates related to it. Keytruda is continuously growing and expanding into new indications and markets globally. The drug generated sales of almost $8 billion in the first nine months of 2019, reflecting a massive 63% surge year over year.
The Keytruda development program is also progressing well with Merck spending billions for research and development of this medicine to secure more approvals in earlier lines of treatment. Undoubtedly, Keytruda has strong growth prospects based on increased utilization, approval for new indications and expectation of additional approvals worldwide. In addition, Merck’s other new products, Lynparza, and Bridion are contributing meaningfully to its top line.
The company has also been on a strong footing in terms of collaborations and M&A activity. Merck’s animal health and vaccine products are also performing well and remain core growth drivers.
Glaxo’s earnings estimates have increased 6.2% for 2019 and 2.0% for 2020 over the past 60 days. The company’s shares have rallied 14.8% this year so far.
Glaxo’s three newest products approved in 2017 — Trelegy Ellipta, Shingrix and Juluca — did well in 2018 and so far in 2019, particularly Shingrix. In fact, these new products coupled with the restructuring in the Consumer Health unit strengthened Glaxo’s competitive position. It has also made significant progress with its late-stage pipeline. The company has had major positive data read-outs on multiple new medicines in HIV, oncology, immuno-inflammation and respiratory in 2019. Glaxo has also made significant progress in its oncology pipeline recently and now has 16 assets in development, up from 8 as of July 2018. Meanwhile, Glaxo now has a number of molecules with diverse mechanisms of action, offering an opportunity for many innovative cancer combinations.
The company has its share of challenges in the form of stiff competition, genericization and pricing pressure on key drugs in the Pharma segment. Nonetheless, higher sales of new products, pipeline success and accretive deals are expected to keep the stock afloat through the rest of the year.
Bristol Myers’ earnings estimates have increased 2.6% for 2019 and 2.7% for 2020 over the past 60 days. The stock has returned 12.6% so far in 2019.
Bristol-Myers’ lead immuno-oncology drug, Opdivo, continues to drive growth. Label expansion of the drug into additional indications should boost the top line in the future. Its multiple myeloma drug, Empliciti and leukemia medicine, Sprycel are also performing well on label expansions. Moreover, Bristol-Myers has presence in other core therapeutic areas, including immunoscience and cardiovascular. Blood thinner drug, Eliquis, is also expected to drive further growth. Meanwhile, the impending acquisition of Celgene will broaden the company’s oncology portfolio with the addition of Revlimid.
Novo Nordisk NVO
Shares of Novo Nordisk have risen 25.7% this year so far. Earnings estimates for 2019 and 2020 have jumped 0.8% and 1.0%, respectively, over the past 60 days.
Novo Nordisk has one of the broadest diabetes portfolios in the industry. A solid performance from Tresiba, Victoza, Ozempic, Xultophy and Saxenda drove the company’s sales in the year so far. Label expansion of Victoza continues to boost performance. Its newest diabetes injection, Ozempic, continues to gain market share. The FDA recently approved semaglutide in tablet form under the brand name, Rybelsus, which should bring in more sales.
Large Cap Pharmaceuticals Industry 5YR % Return
Large Cap Pharmaceuticals Industry 5YR % Return
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