The pharmaceutical industry is poised to stay afloat because of consistent medical breakthroughs and escalating global demand for healthcare. Therefore, quality pharma stocks Johnson & Johnson (JNJ), Novartis AG (NVS), and Dr. Reddy's Laboratories Limited (RDY), with promising pipelines, could be solid buys now.
The pharma industry is anticipated to remain robust in the upcoming months due to the rapid spread of COVID-19's new variants, EG.5 (Eris), accounting for approximately 20% of infections in the United States and BA.2.86. Despite WHO’s assurances of its low risk to public health, the uptick in infections and hospitalizations prompted pharmaceutical leaders to update the existing vaccines.
Leading clinical research institutions and pharma giants have received over $1.4 billion in funding to pioneer new COVID-19 vaccines and treatments under President Biden's $5 billion Project NextGen initiative.
Pharma giants continually innovate within their pipelines, a strategy tailored not only to catalyze revenue growth but also to meet the competitive imperatives of the industry. Companies invest over 20% of their sales into research and development, primarily emphasizing drug discovery. The success of these innovations and expansion into critical therapeutic domains, coupled with solid results from clinical studies, could serve as pivotal accelerators.
Additionally, the sector has witnessed rapid advancements with a growing demand for generic drugs due to the widespread prevalence of chronic diseases, rising aging population, rapid technological advancements, gene therapy explorations, and improved aftercare services.
As per Statista, revenue in pharma is expected to reach $1.48 trillion by 2028, growing at a CAGR of 5.8%. Moreover, investors’ interest in pharma stocks is substantiated by SPDR S&P Pharmaceuticals ETF’s (XPH) 6.5% gain over the past three months.
Furthermore, investors tend to invest in stocks with stable returns to secure their investments amid market uncertainty. Given this backdrop, dividend-paying pharma stocks JNJ, NVS, and RDY, with promising pipelines, could be wise portfolio additions now.
Johnson & Johnson (JNJ)
JNJ researches, develops, manufactures, and sells various products in the healthcare field worldwide. The company operates through the broad segments of Consumer Health; Pharmaceuticals; and MedTech.
Among the Department of Health and Human Services’ $1.4 billion grant to support the development of next-generation COVID-19 vaccines and treatments, JNJ has recently received $10 million in funding to bankroll startups targeting infectious disease treatment and prevention.
On August 11, JNJ’s The Janssen Pharmaceutical Companies announced the U.S. Food & Drug Administration’s (FDA) approval of AKEEGA™ (niraparib and abiraterone acetate), the first-and-only dual-action tablet for the treatment of patients with BRCA-positive metastatic castration-resistant prostate cancer.
On July 20, JNJ declared a dividend of $1.19 per share on its common stock, paid to the shareholders on September 7, 2023. JNJ has raised dividends for 60 consecutive years, which reflects its cash-generation abilities.
Its annual dividend of $4.76 yields 2.89% on the current market price, and its four-year average dividend yield is 2.62%. The company’s dividend payouts have increased at 5.8% and 5.9% CAGRs over the past three and five years, respectively.
JNJ’s trailing-12-month EBIT and levered FCF margins of 27.66% and 21.99% are significantly higher than the industry averages of 0.24% and 0.04%, respectively. Its trailing-12-month asset turnover ratio of 0.53x is 40.4% higher than the 0.38x industry average.
During the fiscal second quarter that ended July 2, 2023, JNJ’s sales to customers increased 6.3% year-over-year to $25.53 billion, with the pharmaceutical segment up 3.1% year-over-year to $13.73 billion. Its gross profit grew 7.6% from the prior-year quarter to $17.32 billion.
The company’s adjusted net earnings and net earnings per share stood at $7.36 billion and $2.80, representing 6.5% and 8.1% increases year-over-year, respectively.
JNJ’s revenue and EPS are expected to increase by 5.1% and 4.8% year-over-year to $25.01 billion and $2.67, respectively, for the fiscal third quarter ending September 2023. It surpassed EPS estimates in all the trailing four quarters, which is impressive.
JNJ’s shares have gained 5.4% over the past three months to close the last trading session at $165.09. Over the past six months, it gained 5.8%.
JNJ’s POWR Ratings reflect this promising outlook. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
JNJ has a B grade for Growth, Stability, and Quality. Within the Medical – Pharmaceuticals industry, it is ranked #7 out of 161 stocks.
Click here for JNJ’s additional POWR Ratings for Value, Momentum, and Sentiment.
Novartis AG (NVS)
Headquartered in Basel, Switzerland, NVS researches, develops, manufactures, and markets healthcare products worldwide. The company operates through two segments: Innovative Medicines and Sandoz.
Recently, Sandoz, a global leader in generic and biosimilar medicines, received the US FDA’s approval for its biosimilar Tyruko® (natalizumab-sztn), developed by Polpharma Biologics. This is the first and only FDA-approved biosimilar for relapsing multiple sclerosis (MS) forms. This should bode well for NVS.
On August 11, NVS completed the acquisition of Chinook Therapeutics, Inc., a Seattle, WA, based biopharmaceutical company focused on the discovery, development, and commercialization of precision medicines for kidney diseases, in a transaction valued at up to $3.5 billion.
Leveraging the combined resources and expertise, NVS could further advance the development of promising treatments to benefit patients with rare, severe chronic kidney diseases.
During the first half of 2023, NVS repurchased 61.3 million shares for $5.8 billion on the SIX Swiss Exchange's second trading line. Moreover, the company pays an annual dividend of $3.50, which yields 3.40%. Its four-year average dividend yield is 3.62%. The company’s dividend payouts have increased at 4.3% and 3.6% CAGRs over the past three and five years, respectively.
The stock’s trailing-12-month EBIT and levered FCF margins of 27.69% and 22.44% are significantly higher than the industry averages of 0.24% and 0.04%, respectively. Its trailing-12-month asset turnover ratio of 0.45x is 20.4% higher than the industry average of 0.38x.
In the fiscal second quarter that ended June 30, 2023, NVS’ net sales increased 6.6% year-over-year to $13.62 billion, while operating income grew 31.1% from the year-ago value to $2.92 billion.
During the same period, its core net income and EPS reached $3.81 billion and $1.83, representing 11.1% and 17.3% year-over-year increases, respectively. In addition, its free cash flow amounted to $3.28 billion.
The consensus revenue and EPS estimates of $13.82 billion and $1.78 for the third quarter (ending September 2023) represent 10.2% and 12.7% improvements year-over-year. Additionally, the company surpassed the EPS estimates in three of the trailing four quarters.
Over the past year, the stock has gained 20.6% to close the last trading session at $100.84. The stock has gained 17.8% over the past six months.
It’s no surprise that NVS has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
It has an A grade for Growth and Stability and a B for Value, Sentiment, and Quality. Within the same industry, it is ranked first.
In addition to the POWR Ratings we stated above, we also have NVS’ rating for Momentum. Get all NVS ratings here.
Dr. Reddy's Laboratories Limited (RDY)
Headquartered in Hyderabad, India, RDY operates as an integrated pharmaceutical company through four distinct segments: Global Generics; Pharmaceutical Services & Active Ingredients (PSAI); Proprietary Products and Others.
On August 10, RDY announced the launch of Saxagliptin and Metformin Hydrochloride Extended-Release Tablets in the U.S. market, a therapeutic equivalent generic version of KOMBIGLYZE® XR tablets, approved by the USFDA. This should bode well for the company.
RDY pays an annual dividend of $0.48, translating to a 0.66% yield on the current prices. Its four-year average dividend yield is 0.60%. Also, its dividend payouts have grown at a 13.1% CAGR over the past three years and a 10.6% CAGR over the past five years.
RDY’s trailing-12-month EBIT and levered FCF margins of 23.57% and 11.21% are significantly higher than the industry averages of 0.24% and 0.04%, respectively. Also, its trailing-12-month asset turnover ratio of 0.83x is 119.5% higher than the industry average of 0.38x.
During the fiscal first quarter that ended June 30, 2023, RDY’s revenues increased 29.1% year-over-year to $821 million, while its gross profit improved by 52.1% from the year-ago value to $482 million.
Its results from operating activities increased 44.3% year-over-year to $215 million. The company’s profit for the period improved by 17.9% from the prior-year quarter to $171 million, while its earnings per share stood at $1.03, up 18.4% year-over-year.
RDY’s revenue is expected to grow 10.2% year-over-year in the fiscal second quarter ending September 2023 to reach $844.02 million, while its EPS is expected to come at $0.70. Moreover, it surpassed the revenue and EPS estimates in each of the trailing four quarters.
The stock has gained 37.2% year-to-date to close the last trading session at $70.98. Over the past three months, it gained 29.8%.
RDY’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, translating to a Strong Buy in our proprietary rating system.
RDY has a B grade for Value, Stability, Sentiment, and Quality. Within the same industry, it is ranked #6.
Beyond what we have highlighted above, one can see RDY’s additional ratings (Growth and Momentum) here.
What To Do Next?
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JNJ shares rose $0.50 (+0.31%) in premarket trading Friday. Year-to-date, JNJ has declined -5.56%, versus a 15.61% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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