Investors favor the pharmaceutical sector for its consistent profitability regardless of economic conditions. Additionally, the industry is well-positioned for growth due to the rise in chronic diseases, a rapidly aging population, and the development of drugs for rare conditions.
To that end, it could be wise to buy fundamentally strong pharma stocks: Merck & Co., Inc. (MRK), Johnson & Johnson (JNJ), and AbbVie Inc. (ABBV).
Before diving deeper into the fundamentals of these stocks, let’s discuss why the pharmaceutical industry is well-positioned for growth.
The pharmaceutical market is thriving thanks to the introduction of innovative drugs and rising demand for quality drugs and therapies, particularly in emerging countries. This year, global revenues are set to hit $1.12 trillion, and projections indicate a future market size of $1.48 trillion by 2028, growing at a CAGR of 5.8%.
The United States will likely command a 43.7% market share in the global pharmaceutical industry in 2023. Furthermore, the U.S. is expected to spend between $605 billion and $635 billion on medicines by 2025.
Moreover, global spending on medications is on the rise. A report by the IQVIA Institute for Human Data Science forecasts that by 2027, worldwide spending on medicines will reach around $1.9 trillion, with a growth rate of 3-6%, driven by the introduction of new drugs and increased use of recently launched brands.
On top of it, AI is transforming the pharmaceutical sector by revolutionizing drug discovery, improving manufacturing processes, and fostering strategic partnerships. Companies are prioritizing innovation to bolster patent portfolios and make strategic AI investments.
Considering these conducive trends, let’s take a look at the fundamentals of the three above-mentioned Medical - Pharmaceuticals stocks.
Stock #3: Merck & Co., Inc. (MRK)
MRK operates as a healthcare company worldwide. It operates through two segments: Pharmaceutical and Animal Health. The company's offerings include global healthcare solutions in human health pharmaceuticals (oncology, immunology) and preventive vaccines. The Animal Health segment provides veterinary pharmaceuticals, vaccines, and digital health products.
On November 10, 2023, MRK announced that the European Medicines Agency’s CHMP recommends approval for KEYTRUDA in combination with gemcitabine and cisplatin as a first-line treatment for biliary tract carcinoma, based on positive Phase 3 trial results.
Earlier in November, the U.S. FDA approved this combination for biliary tract cancer, a rare and aggressive group of cancers affecting the liver, gallbladder, and bile ducts.
On June 16, 2023, MRK acquired Prometheus Biosciences, Inc. The main candidate, PRA-023 (MK-7240), a monoclonal antibody, shows promise in treating immune-mediated diseases like ulcerative colitis and Crohn’s disease.
MRK’s Chairman and CEO Robert M. Davis said, “The Prometheus acquisition accelerates our growing presence in immunology, augments our diverse pipeline and increases our ability to deliver patient value. This transaction is another example of Merck acting strategically and decisively when science and value align.”
In terms of the trailing-12-month gross profit margin, MRK’s 73.09% is 30.5% higher than the 55.99% industry average. Likewise, its 0.55x trailing-12-month asset turnover ratio is 45.5% higher than the 0.38x industry average. However, its 6.78% trailing-12-month Capex/Sales is 58.9% lower than the 4.27% industry average.
For the fiscal third quarter that ended September 30, 2023, MRK’s sales increased 6.7% year-over-year to $15.96 billion. Its pharmaceutical sales increased 10% year-over-year to $14.26 billion. Its non-GAAP net income attributable to MRK and non-GAAP EPS came in at $5.43 billion and $2.13, representing 15.4% and 15.1% year-over-year, respectively.
For the quarter ending December 31, 2023, MRK’s revenue is expected to increase 4.9% year-over-year to $14.51 billion. Likewise, its EPS for the quarter ending March 31, 2024, is expected to increase 39.8% year-over-year to $1.96. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 1.8% to close the last trading session at $102.17.
MRK’s POWR Ratings reflect a favorable outlook. 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 has a B grade for Value, Stability, and Quality. It is ranked #13 out of 152 stocks in the Medical - Pharmaceuticals industry. To see MRK’s Growth, Momentum, and Sentiment ratings, click here.
Stock #2: Johnson & Johnson (JNJ)
JNJ researches, develops, manufactures, and sells various products in the healthcare field worldwide. It operates in three segments; Consumer Health Segment, Pharmaceutical Segment, and MedTech Segment.
On August 10, 2023, The Janssen Pharmaceutical Companies of JNJ announced that the FDA accelerated approval for TALVEY, a bispecific antibody treating relapsed/refractory multiple myeloma. TALVEY, a bispecific T-cell engaging antibody, showed efficacy in Phase 2, providing a new option for heavily treated patients.
In terms of the trailing-12-month EBITDA margin, JNJ’s 35.49% is 598.4% higher than the 5.08% industry average. Likewise, its 67.56% trailing-12-month gross profit margin is 20.7% higher than the 55.99% industry average. Additionally, its 4.60% trailing-12-month Capex/Sales is 7.8% higher than the 4.27% industry average.
JNJ’s sales for the third quarter ended September 30, 2023, increased 6.8% year-over-year to $21.35 billion. Its gross profit increased 6.7% year-over-year to $14.75 billion. The company’s adjusted net earnings rose 14.1% year-over-year 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 for the quarter ending December 31, 2023, to increase 4.9% year-over-year to $2.46. Its revenue for the fiscal year ending December 31, 2024, is expected to increase 3.5% year-over-year to $87.70 billion. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past month, the stock declined 5.9% to close the last trading session at $147.66.
It’s no surprise that JNJ has an overall rating of A, which translates to a Strong Buy in our proprietary POWR Ratings system.
It is ranked #7 in the same industry. It has a B grade for Value, Stability, and Quality. Click here to see JNJ’s Growth, Momentum, and Sentiment ratings.
Stock #1: AbbVie Inc. (ABBV)
ABBV discovers, develops, manufactures, and sells pharmaceuticals worldwide. It offers a diverse range of pharmaceutical products, including treatments for autoimmune diseases, dermatology, rheumatology, oncology, neuroscience, eye care, gastroenterology, and endocrinology. Some of the products in its portfolio are HUMIRA, SKYRIZI, and RINVOQ.
On October 30, ABBV announced it signed a supply agreement with NEXGEL, Inc.’s subsidiary, CG Converting and Packaging, to provide gel pads for use with ABBV’s Rapid Acoustic Pulse device, which is being investigated for its potential in improving the appearance of cellulite.
In terms of the trailing-12-month gross profit margin, ABBV’s 69.92% is 24.9% higher than the 55.99% industry average. Likewise, its 0.40x trailing-12-month asset turnover ratio is 4.2% higher than the 0.38x industry average. Additionally, its 50.77% trailing-12-month EBITDA margin is 899.1% higher than the 5.08% 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 came in at $5.25 billion and $2.95 per share.
ABBV surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past six months, the stock has declined 6.2% to close the last trading session at $138.06.
ABBV’s POWR Ratings reflect strong 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, Stability, and Sentiment. It is ranked #2 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 and Momentum. Get all the ABBV’s ratings here.
What To Do Next?
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JNJ shares were trading at $148.23 per share on Wednesday morning, up $0.57 (+0.39%). Year-to-date, JNJ has declined -14.23%, versus a 19.15% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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