The Zacks Large Cap Pharmaceuticals industry, comprising some of the biggest drugmakers in the world, has gained 4.9% in 2019 so far compared with the S&P 500’s increase of 13.1%.
Large –Cap Pharma Versus S&P 500
The S&P 500 Index witnessed a bull run in the first quarter of 2019 despite pockets of volatility. Upbeat economic growth, improving business sentiment and a dovish Fed helped the S&P 500 rally in the quarter. The large-cap pharmaceutical industry has underperformed the S&P 500 probably due to some pipeline related setbacks. Also, the fourth-quarter results were mostly below expectations and the earnings and sales outlook for 2019 was rather soft.
Nonetheless, the sector is largely expected to pick up as the year progresses.
The Large-Cap Pharmaceuticals industry features among the top 34% of the 255 Zacks-ranked industries
We believe that new product sales ramp up as a result of rising demand driven by a growth in ageing population, successful innovation and product line extensions in important therapeutic areas, strong clinical study results, and frequent FDA approvals should help the big drug giants to do well this year despite broader macro issues or the industry’s own challenges. Moreover, the industry is likely to perform well even if the global economy slows down this year, as is widely expected. This is because it is a defensive growth sector, which is almost insulated from broader macroeconomic factors.
Importantly, mergers and acquisition activity has risen this year relative from 2018, which positions the sector for growth. A key announcement this year was Bristol-Myers’ BMY offer to buy Celgene CELG for $74 billion, the biggest merger in the industry. Other important acquisition announcements include Lilly’s LLY purchase of small cancer biotech, Loxo Oncology and Merck’s MRK pending acquisition of Immune Design. Meanwhile, Glaxo GSK closed its previously announced acquisition of small cancer biotech Tesaro in January.
Meanwhile, most big pharma companies are resorting to restructuring activities, which is increasing their financial capacity. The funds can be used to re-stock pipelines with promising new drug candidates bought from smaller innovative drug/biotech companies.
However, the sector faces its share of 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 major pipeline setbacks.
Nonetheless, we believe pipeline success, cost cutting, share buybacks, product launches, increased M&A and collaboration activity and appropriate utilization of cash should keep the sector afloat through the rest of this year.
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 an industry. Given this backdrop, it makes sense to invest in some of the bigshot drugmakers.
Here we have highlighted three stocks that may prove to be good buys. All these stocks carry a Zacks Rank #2 (Buy) and have seen their share price and earnings estimates rise this year so far. 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 three stocks this year so far is given below.
Shares of Merck have risen 8.8% this year so far. Merck’s earnings estimates for 2019 have gone up 0.6% while that for 2020 has moved up by 0.4% in the past 30 days.
Merck’s new products like Keytruda, Lynparza, and Bridion are contributing meaningfully to its top line. Sales of its blockbuster PD-L1 inhibitor, Keytruda are gaining momentum with approval for additional indications, especially in first-line lung cancer setting. We believe Keytruda has strong growth prospects based on increased utilization, recent approvals for new indications and potential additional approvals worldwide. Meanwhile, Merck’s animal health and vaccine products are also performing strongly and remain core growth drivers.
Johnson & Johnson JNJ
J&J’s shares have risen 8.3% this year so far, a decent recovery from the decline last year. Its earnings estimates for 2019 have gone up 0.1% in the past 30 days.
J&J’s sales growth accelerated in 2018 backed by above-market sales growth in the Pharmaceutical segment and improving performance in Medical Devices unit. Though generic/biosimilar headwinds in the Pharmaceutical segment will hurt J&J’s sales and profits in 2019, both are expected to accelerate in 2020 supported by drug launches, successful label expansion of cancer drugs like Imbruvica and Darzalex and immunology drug, Stelara. J&J is also making rapid progress with its pipeline and line extensions. Meanwhile, share buybacks and restructuring initiatives should provide bottom-line support.
Roche’s earnings estimates have increased 0.9% for 2019 over the past 30 days. The company’s shares have increased 10.6% this year so far.
Roche’s performance was impressive in 2018 as it combated biosimilar competition in Europe. Strong growth from Ocrevus, Perjeta, Tecentriq, Alecensa and Hemlibra has been more than offset by lower sales of MabThera/Rituxan and Tarceva. In particular, multiple sclerosis drug Ocrevus witnessed strong growth, driven by increased demand. Meanwhile, the company continues to progress with its pipeline as it looks to restructure its portfolio beyond oncology into MS and hemophilia among others. The Ignyta acquisition of 2018 further strengthened Roche’s cancer pipeline.
Zacks' Top 10 Stocks for 2019
In addition to the stocks discussed above, wouldn't you like to know about our 10 finest buy-and-holds for the year?
From more than 4,000 companies covered by the Zacks Rank, these 10 were picked by a process that consistently beats the market. Even during 2018 while the market dropped -5.2%, our Top 10s were up well into double-digits. And during bullish 2012 – 2017, they soared far above the market's +126.3%, reaching +181.9%.
This year, the portfolio features a player that thrives on volatility, an AI comer, and a dynamic tech company that helps doctors deliver better patient outcomes at lower costs.
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Johnson & Johnson (JNJ) : Free Stock Analysis Report
Roche Holding AG (RHHBY) : Free Stock Analysis Report
Eli Lilly and Company (LLY) : Free Stock Analysis Report
GlaxoSmithKline plc (GSK) : Free Stock Analysis Report
Bristol-Myers Squibb Company (BMY) : Free Stock Analysis Report
Merck & Co., Inc. (MRK) : Free Stock Analysis Report
Celgene Corporation (CELG) : Free Stock Analysis Report
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