The pharmaceutical industry’s long-term prospects look promising, given the ever-expanding market for quality drugs and therapies. Moreover, due to the inelastic demand for its products, the pharmaceutical industry generally sustains its profit margins, rendering companies in this sector less vulnerable to economic downturns.
In this context, an evaluation of Eli Lilly and Company (LLY), Johnson & Johnson (JNJ), and AbbVie Inc. (ABBV) reveals that each of them is well-positioned to surpass the broader market performance this year.
Before diving deeper into their fundamentals, let’s discuss what’s shaping the pharma industry’s prospects.
Pharma companies have been investing heavily in research and development (R&D) and are shoring up their manufacturing capabilities to meet the world’s growing healthcare needs.
Most pharma companies are focusing on precision medicine and personalized treatment, which takes into account factors like a patient’s age, genetics, and unique traits to help improve the response rate to a chosen treatment, lessen side effects, and lower the treatment period.
Additionally, the increase in chronic diseases like cancer and diabetes, coupled with a growing elderly population vulnerable to severe diseases, is expected to drive the progress of the pharmaceutical sector.
The pharmaceutical industry’s revenue is expected to reach $1.16 trillion this year and grow at a CAGR of 6.2% to reach $1.47 trillion by 2028. Investors’ interest in pharmaceutical stocks can be gauged from VanEck Pharmaceutical ETF’s (PPH) 8.7% returns over the past six months.
In light of these encouraging trends, let’s look at the fundamentals of the three Medical - Pharmaceuticals stock picks, beginning with number 3.
Stock #3: Eli Lilly and Company (LLY)
LLY discovers, develops, and markets human pharmaceuticals worldwide. It offers Basaglar, Humalog, Humalog Mix 75/25, Humalog U-200, Humalog Mix 50/50, insulin Iispro, insulin Iispro protamine, insulin Iispro mix 75/25, Humulin, Humulin 70/30, Humulin N, Humulin R, and Humulin U-500 for diabetes; and Jardiance, Trajenta, and Trulicity for type 2 diabetes.
On December 27, 2023, LLY announced the acquisition of POINT Biopharma Global Inc., a radiopharmaceutical company with a pipeline of clinical and preclinical-stage radioligand therapies in development for the treatment of cancer. The acquisition provides LLY access to POINT’s radiopharmaceutical manufacturing campus in Indianapolis, Ind., and its radiopharmaceutical research and development center in Toronto.
In terms of the trailing-12-month EBITDA margin, LLY’s 35.28% is 650.8% higher than the 4.70% industry average. Likewise, its 12.17% trailing-12-month levered FCF margin is significantly higher than the industry average of 0.32%. Furthermore, its 8.97% trailing-12-month Capex/Sales is 113.7% higher than the 4.20% industry average.
LLY’s revenue for the third quarter ended September 30, 2023, increased 37% year-over-year to $9.50 billion. The company’s non-GAAP gross margin increased 41.5% year-over-year to $7.76 billion. Its non-GAAP net income came in at $94.80 million. Also, its non-GAAP EPS came in at $0.10.
Analysts expect LLY’s EPS and revenue for the quarter ended December 31, 2023, to increase 30.2% and 23.2% year-over-year to $2.72 and $9 billion, respectively. Over the past nine months, the stock has gained 68.9% to close the last trading session at $628.91.
LLY’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #30 out of 162 stocks in the Medical – Pharmaceuticals industry. It has a B grade for Growth, Sentiment, and Quality. To see the additional ratings of LLY for Value, Momentum, and Stability, click here.
Stock #2: Johnson & Johnson (JNJ)
JNJ researches, develops, manufactures, and sells various products in the healthcare field worldwide. It operates under three segments: Consumer Health, Pharmaceutical, and MedTech. The company’s brands include AVEENO, CLEAN & CLEAR, DR. CI:LABO, NEUTROGENA, and OGX brands, LISTERINE, TYLENOL, SUDAFED, BENADRYL, STAYFREE and CAREFREE.
On January 8, 2024, JNJ announced that it entered into a definitive agreement to acquire Ambrx Biopharma, Inc. (AMAM), a clinical-stage biopharmaceutical company with a proprietary synthetic biology technology platform to design and develop next-generation antibody-drug conjugates. The acquisition presents an opportunity for JNJ to design, develop, and commercialize targeted oncology therapeutics.
Yusri Elsayed, M.D., M.H.Sc., Ph.D., Global Therapeutic Area Head, Oncology, JNJ Innovative Medicine, said, “The results seen to date with ARX517 in mCRPC are promising and representing a potential first- and best-in-class targeted therapy for the treatment of this aggressive disease.”
“In addition, Ambrx’s pipeline and ADC platform present exciting future opportunities to deliver enhanced, precision biologics as we look to transform the treatment of cancer and improve patients’ lives,” he added.
In terms of trailing-12-month net income margin, JNJ’s 35.10% compares to the negative 5.95% industry average. Likewise, its 27.97% trailing-12-month EBIT margin is significantly higher than the industry average of 0.48%. Furthermore, the stock’s 21.46% trailing-12-month levered FCF margin is substantially higher than the 0.32% industry average.
For the fiscal third quarter, which ended September 30, 2023, JNJ’s reported sales rose 6.8% year-over-year to $21.35 billion. Its gross profit rose 6.7% year-over-year to $14.75 billion. The company’s adjusted net earnings increased 14.1% over the prior-year quarter to $6.78 billion. In addition, its adjusted EPS came in at $2.66, representing an increase of 19.3% year-over-year.
Street expects JNJ’s EPS and revenue for fiscal 2024 to increase 8% and 3.8% year-over-year to $10.71 and $87.94 billion, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past month, the stock has gained 3.4% to close the last trading session at $160.43.
JNJ’s POWR Ratings reflect this positive outlook. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
Within the same industry, it is ranked #9. It has a B grade for Value, Stability, and Quality. Click here to see the other ratings of JNJ for Growth, Momentum, and Sentiment.
Stock #1: AbbVie Inc. (ABBV)
ABBV discovers, develops, manufactures, and sells pharmaceuticals worldwide. It offers Humira, Skyrizi, and Rinvoq, and Venclexta/Venclyxto. It also provides facial injectables, plastics and regenerative medicine, body contouring, and skin care products, Vraylar, Duopa and Duodopa, Ubrelvy, Qulipta, Lumigan/Ganfort, Alphagan/Combigan, Restasis, and others.
On December 6, 2023, ABBV announced a definitive agreement under which it will acquire Cerevel Therapeutics (CERE) and its neuroscience pipeline of multiple clinical-stage and preclinical candidates with potential across several diseases, including schizophrenia, Parkinson’s disease, and mood disorders.
The acquisition complements ABBV’s neuroscience portfolio, adding a range of potential best-in-class assets.
In terms of the trailing-12-month gross profit margin, ABBV’s 69.92% is 22.4% higher than the 57.14% industry average. Likewise, its 0.40x trailing-12-month asset turnover ratio is 0.7% higher than the 0.39x industry average. Additionally, its 50.77% trailing-12-month EBITDA margin is 980.3% higher than the 4.70% industry average.
ABBV’s net revenues for the fiscal third quarter that ended September 30, 2023, came in at $13.93 billion. Its operating earnings stood at $2.28 billion. Moreover, the company’s non-GAAP net earnings and EPS came in at $5.25 billion and $2.95, respectively.
For the quarter ending March 31, 2024, ABBV’s EPS is expected to increase 0.8% year-over-year to $2.48. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past six months, the stock has gained 20.2% to close the last trading session at $162.04.
ABBV’s POWR Ratings reflect solid prospects. It has an overall rating of A, translating to a Strong Buy in our proprietary rating system.
It has an A grade for Quality and a B for Value and Stability. It is ranked #5 in the Medical – Pharmaceuticals industry. In total, we rate ABBV on eight different levels. Beyond what we stated above, we also have given ABBV grades for Growth, Momentum, and Sentiment. Get all the ABBV’s ratings here.
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LLY shares were trading at $616.11 per share on Thursday morning, down $12.80 (-2.04%). Year-to-date, LLY has gained 5.69%, versus a -0.23% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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