The Zacks Large Cap Pharmaceuticals industry comprises some of the largest global companies that develop multi-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. 

Some of the prominent stocks in this industry are Pfizer, Merck, AbbVie, Lilly, J&J (JNJ), Novartis (NVS), Roche and AstraZeneca (AZN), among others.

Here are the industry’s three major themes:

• Demand-driven growth in sales of new products, successful innovation and product line extensions in important therapeutic areas, strong clinical study results, frequent FDA approvals, continued strong performance of key products, growing demand for drugs, especially for rare-to-treat diseases, an aging population, and increased health care spending are some of the factors boosting growth.
   
• 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, sloppy sales of mature drugs, dwindling in-house pipelines, government scrutiny of drug prices and emergence of big tech firms like Apple and Google in the healthcare industry whet the M&A appetite of large drugmakers. However, after a flurry of deals in 2019, M&A activity significantly slowed down in 2020, mainly due to the impact of the coronavirus pandemic. However, collaborations and partnerships with smaller companies are in full swing this year, mainly for making antivirals and vaccines for COVID-19.
   
• Headwinds for the industry include 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.

The coronavirus pandemic has significantly hurt economic growth, hitting some industries harder than the others. While economic damage to the retail, restaurants, gaming, transportation and travel industries has been the maximum, the impact on the large drug sector has been relatively softer. In fact, all eyes are on this sector to find a cure/vaccine for the deadly COVID-19 disease and bring an end to the global economic catastrophe. Several drug/biotech companies are working on making new antibodies, drugs and vaccines to combat the disease.

However, in the recently completed second quarter. almost all companies witnessed a significant negative impact on their top line due to business disruption and reduced doctor visits in the United States amid COVID-19-related mobility restrictions & limitations. Coronavirus-related stockpiling benefits, which had increased sales of several medicines in the first quarter, reversed in the second quarter and hurt sales. However, companies witnessed a recovery toward the end of the second quarter and into the third as trends of patient visit to doctors, vaccinations and elective surgical procedures began improving. Companies are hopeful of a return to more normal levels in the fourth quarter.

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 #188, which places it in the bottom 26% 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 Underperforms S&P 500 &Sector

The Zacks Large Cap Pharmaceuticals industry is a 15-stock group within the broader Medical  sector. It has underperformed the S&P 500 as well as the Zacks Medical Sector on a year-to-date basis.

While the stocks in this industry have collectively declined 0.2% year to date, the Zacks S&P 500 composite and the Zacks Medical Sector have risen 4.2% and 0.6%, respectively.

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 14.73X compared with the S&P 500’s 22.80X and the Zacks Medical sector’s 22.11X.

Over the last five years, the industry has traded as high as 16.62X, as low as 13.61X and at a median of 15.32X as the chart below shows.

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

Bottom Line

In order to succeed in a changing global market and evolv­ing healthcare landscape, pharmaceutical companies need to adopt innovative business models, invest in new technologies, raise investments in personalized medicines and seek external partners and collabora­tors for complementary strengths.

The sector faces its share of headwinds like government scrutiny of high drug prices, pricing and competitive pressure, generic competition for blockbuster treatments and most importantly major pipeline setbacks. Though the second-quarter results were disappointing, we believe it has bright long-term prospects once the coronavirus-related uncertainty subsides

Meanwhile, risks for a prolonged global recession have risen with coronavirus cases rising around the world. The pharma and biotech sector is considered a defensive space as it is not much impacted by a recession. This is because people will continue to buy medicines even amid difficult times.

In the Large Cap Pharmaceuticals universe, none of the companies has a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy). Most of the companies carry a Zacks Rank of 3 (Hold). Here we discuss four companies, all with a Zacks Rank of 3.

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

Eli Lilly & Company (LLY): Shares of this Indianapolis, IN based drugmaker have gained 14.6% this year so far. The Zacks Consensus Estimate for current-year EPS has been revised 3.4% upward over the past 30 days.

Price and Consensus: LLY

AbbVie (ABBV): Shares of this North Chicago, IL based drugmaker have risen 4.6% this year so far. The Zacks Consensus Estimate for current-year EPS has been revised 0.7% upward over the past 30 days.

Price and Consensus: ABBV

Merck & Co., Inc. (MRK): The Zacks Consensus Estimate for this Kenilworth, NJ -based drugmaker’s current-year EPS has risen 5.5% over the past 30 days. The stock has declined 11.1% so far this year.

Price and Consensus: MRK

Pfizer, Inc. (PFE): The Zacks Consensus Estimate for this New York based drugmaker’s current-year EPS has risen 0.7% over the past 60 days. The stock has declined 3.6% so far this year.

Price and Consensus: PFE

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