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4 Large-Cap Drugmaker Stocks to Watch Despite Omicron Woes

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·10 min read
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The drug and biotech sectors remained in the limelight in 2021. The pharma, biotech and medical devices companies played a vital role in 2021, by bringing the pandemic slightly under control through the development of vaccines, diagnostic tests and medicines/antibodies to treat COVID-19. The vaccines allowed global economies to recover to some extent.

Just when things looked somewhat under control, the highly contagious Omicron variant of the virus struck toward the end of 2021, throwing the world into disarray again. Infection rates are rising to record highs globally and Omicron is already doing economic damage. However, Omicron is expected to pass quickly and growth is expected to rebound in the second quarter of the year. It looks like drug/biotech and medical device companies will continue to remain in the spotlight in 2022. Among the large drugmakers Roche RHHBY, Pfizer PFE, AbbVie ABBV, and Merck MRK are worth retaining in your portfolio.

Industry Description

The Zacks Large Cap Pharmaceuticals industry comprises some of the largest global companies that developmulti-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. Continuous innovation is a defining characteristic of pharma companies and these large drugmakers are constantly investing in drug development and the discovery of new medicines. Regular mergers and acquisitions and collaboration deals are another key feature of large drug companie

What's Shaping the Future of the Large-Cap Pharma Industry?

Innovation and Pipeline Success: For big drugmakers, innovation in their pipeline is a competitive necessity and key to top-line growth. Pharma companies are constantly striving to ramp up innovation and spending a significantly high portion of their revenues on R&D. Successful innovation and product line extensions in important therapeutic areas and strong clinical study results may act as important catalysts for these stocks.

Aggressive M&A & Collaboration Activity: The sector is characterized by aggressive M&A activity. 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 regularly buy innovative small/mid-cap biotech companies to build out their pipelines. Also, the sloppy sales of mature drugs, dwindling in-house pipelines, government scrutiny of drug prices, and the emergence of big tech firms like Apple and Google in the healthcare industry whet the M&A appetite of large drugmakers. In 2021, M&A activity in the pharma and biotech recovered after a dull 2020 when deal-making was hurt by pandemic-led disruption. Though deals were not as plentiful as 2018 and 2019 and there were no mega-mergers, most of the M&A deals of 2021 were valued at more than $1 billion. It is expected that M&A activity will pick up significantly in 2022. The fast-growing and lucrative markets such as oncology and cell and gene therapy are likely to remain focus areas for M&A activities. Also, collaborations and partnerships with smaller companies are in full swing.

Pipeline Setbacks & Other Headwinds: The failure of key pipeline candidates in pivotal studies and regulatory and pipeline delays can be setbacks for large drug companies and significantly hurt their share price. Other headwinds for the industry include pricing and competitive pressure, generic competition for blockbuster treatments, and a slowdown in sales of some of the most high-profile older drugs.

Uncertainty Surrounding the Pandemic: The pandemic has hurt demand trends of physician-administered drugs of most companies. There is still uncertainty about the duration and contemplated impact of the pandemic on the companies’ results and outlook with the recent surge of the heavily-mutated Omicron variant. The spread of Omicron has hurt financial markets. Governments around the world have tightened travel and workplace restrictions.

Zacks Industry Rank Indicates Gloomy 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 #219, which places it in the bottom 14% 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 performance and its current valuation.

Industry Versus S&P 500 & Sector

The Zacks Large Cap Pharmaceuticals industry is a 14-stock group within the broader Medical sector. It has underperformed the S&P 500 but outperformed the Zacks Medical Sector in the past year.

Stocks in this industry have collectively risen 18.6% in the past year compared with the Zacks S&P 500 composite’s rise of 26.2%. The Zacks Medical Sector has declined 16.1% in the said time frame.

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 14.03X compared with the S&P 500’s 21.26X and the Zacks Medical sector's 20.8X.

Over the last five years, the industry has traded as high as 16.00X, as low as 13.18X and at a median of 14.91X as the chart below shows.

Forward 12 Month Price-to-Earnings (P/E) Ratio


4 Large Drugmakers to Keep an Eye On

Pfizer: Pfizer has been riding high on the success of its two-shot vaccine for COVID-19, Comirnaty, which it developed in partnership with Germany-based company, BioNTech. The vaccine was developed in record time and is now approved for emergency/temporary use in several countries worldwide and fully approved in the United States. Pfizer/BioNTech’s vaccine was approved for younger patients (5-17 years) while a booster vaccine dose was also approved in the United States in 2021. Pfizer and BioNTech’s Comirnaty has become a key contributor to the top line. In the last week of December 2021, the FDA granted Emergency Use Authorization (EUA) to Pfizer’s promising oral antiviral candidate for COVID-19, Paxlovid, for the treatment of mild-to-moderate COVID-19 in adult and pediatric patients at increased risk of hospitalizations or death.

In other pipeline successes, Pfizer’s Prevnar-20, a 20-valent pneumococcal conjugate vaccine, was approved in the United States in 2021. Pfizer is also due to acquire Arena Pharmaceuticals for $100 per share or $6.7 billion in an all-cash deal.

Pfizer may as well make another bolt-on acquisition announcement next year, given its strong cash position after the success of Comirnaty.

We believe that no company is as strongly placed in the COVID vaccines/treatment market as Pfizer right now. While the vaccine should continue to boost revenues in 2022, Paxlovid should also become an important top-line driver, with sharply rising infection cases due to the Omicron variant. Paxlovid is expected to work well against the Omicron variant, while most of the monoclonal antibody drugs appear to be largely ineffective against the same.

Pfizer has a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for this New York-based drugmaker’s 2022 EPS has risen 50.3% over the past 60 days. The stock has risen 55.6% in the past year.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: PFE

AbbVie: AbbVie has become one of the top-most pharma companies after it acquired Botox maker Allergan in a cash-and-stock deal for $63 billion in May 2020. AbbVie’s acquisition of Allergan significantly expanded and diversified its revenue base with new therapeutic areas enhancing its long-term growth potential.

AbbVie has built a substantial oncology franchise with Imbruvica and Venclexta. It expects oncology to be its major growth driver over the next 10 years. Label expansion approvals in the past couple of years have expanded the eligible patient population of Venclexta and Imbruvica significantly, which is boosting sales from the drugs.

It has several new drugs in its portfolio like immunology drugs Skyrizi (risankizumab) and Rinvoq (upadacitinib), which have the potential to drive revenues once blockbuster drug Humira loses U.S. exclusivity in 2023. AbbVie also has an impressive late-stage pipeline with several early/mid-stage candidates that have blockbuster potential.

AbbVie has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for this Lake Bluff, IL-based drugmaker’s 2022 EPS has risen 0.7% over the past 60 days. The stock has risen 28.7% in the past year.

Price and Consensus: ABBV

Merck: Merck has a Zacks Rank #3 (Hold). The company boasts more than six blockbuster drugs in its portfolio with a PD-L1 inhibitor, Keytruda, approved for several types of cancer, alone accounting for more than 25% of its pharmaceutical sales. Its drugs Keytruda, Lynparza and Bridion have been driving sales.

Keytruda has played an instrumental role in driving Merck’s steady revenue growth in the past few years. Keytruda sales are gaining from continued uptake in lung cancer and increasing usage in other cancer indications. Merck’s Animal health and vaccine products remain core growth drivers. Sales of Merck’s physician-administered drugs and vaccines are recovering from the impact of the pandemic. Merck also boasts a strong cancer pipeline, including Keytruda, which should help drive long-term growth. In June 2021, Merck spun off products from its Women’s Health unit, legacy drugs and biosimilar products into a new publicly-traded company called Organon & Co.

The separation into two companies should enable Merck to achieve higher profits than the combined company.

Shares of this New Jersey-based drugmaker have risen 6% in the past year. The Zacks Consensus Estimate for 2022 EPS has been revised 3.9% upward over the past 60 days.

Price and Consensus: MRK

Roche: Roche’s performance in 2021 was encouraging with the core pharmaceuticals business showing signs of recovery from COVID-19 disruptions. The diagnostics division maintained its stellar performance on strong demand for COVID-19 tests due to the Delta variant and other diagnostics platforms. Strong growth in Ocrevus, Evrysdi, Tecentriq and Hemlibra continues to counter biosimilar competition for legacy drugs like Herceptin, Avastin and MabThera. The approval of new drugs should also boost the top line. The Diagnostics segment’s strong performance is likely to continue as Roche launched additional products in the year. Shares of this Swiss drugmaker have risen 15% in the past year. The Zacks Consensus Estimate for 2022 EPS has been revised 5.8% upward over the past 60 days. Roche is a #3 Ranked stock.

Price and Consensus: RHHBY



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