Medical innovations like precision medicine, cell and gene therapy, and immuno-oncology fuel new ways of preventing and detecting various diseases and creating tailwinds for the pharmaceutical industry. In addition, technology is powering the industry in activities like drug discovery, manufacturing, and commercialization.
Given their solid fundamentals and high profitability, I believe these pharma stocks, Johnson & Johnson (JNJ), Eli Lilly and Company (LLY), and Dr. Reddy's Laboratories Limited (RDY), should be a part of every investor’s portfolio.
Before divulging about the stocks, let us look at the pharmaceutical industry’s prospects.
The focus of global medicine spending has shifted considerably during the COVID-19 pandemic but is expected to be largely similar to the pre-COVID outlook. Reiterating such facts, The IQVIA institute has predicted that the global pharmaceutical industry to grow to $1.9 trillion by 2027. The demand for innovative drugs will drive oncology spending to approximately $370 billion by 2027, almost double the existing levels.
Additionally, the industry is spending heavily on research and development pertaining to new drug discovery, technology integration, focus on gene therapy, and aftercare services.
The pharmaceutical industry is on the cusp of a major transformation, with new technologies such as pharma tech, genetics, immunotherapy, predictive analytics, and patient empowerment leading the way.
Personalized therapy, which caters to patients' high unmet medical demands, is one of the promising domains of medical treatment. The healthcare industry must align its goals of advancing projects that benefit patients and improve their quality of life.
According to Bayer, a global healthcare provider, 300 million more people will be aged 65 or more, and the global pharma market will remain attractive, growing at an expected CAGR between 3-6% through 2025. Moreover, the global pharmaceuticals market is poised to grow at a CAGR of 5.9% between 2022 and 2030.
Moreover, the inflationary period has brought defensive stocks into the limelight as they remain stable during economic downturns. Pharmaceutical companies are considered defensive as they deal in essential health products to maintain and treat illnesses, and demand for these products will likely remain undeterred.
Considering all such aspects, it could be sensible to invest in fundamentally robust stocks like JNJ, LLY, and RDY that are well-positioned to offer substantial returns. Let’s take a look at these stocks.
Johnson & Johnson (JNJ)
Pharma giant JNJ is engaged in researching, developing, manufacturing, and selling healthcare products, primarily focused on human health and well-being. The company offers a diversified range of products through Consumer Health; Pharmaceutical; and MedTech segments.
On July 24, JNJ announced its plan to split off at least 80.1% of its Consumer Health business Kenvue Inc. shares through an exchange offer. This separation allows the company to focus on its Pharmaceutical and MedTech Research & Development, which would help it deliver innovative and differentiated health outcomes.
Consequent to this development, JNJ claimed that it had received a waiver of the 180-day lock-up with respect to the shares of Kenvue common stock held by it from the joint lead book-running managers to the issue. Further, this transaction should help boost shareholders’ returns.
On July 20, the company declared a quarterly dividend of $1.19 per share on its common stock, payable to its shareholders on September 7, 2023. JNJ’s annual dividend of $4.76 translates to a 2.76% yield on prevailing prices. Its four-year average yield is 2.62%.
The company’s dividend payouts have grown at CAGRs of 5.9% and 6% over the past three and five years, respectively. Also, it has a record of 60 years of consecutive dividend growth.
In the second quarter (ended June 2023), JNJ’s sales to customers increased 6.3% year-over-year to $25.53 billion, while its gross profit grew 7.6% from the same period in the prior year to $17.32 billion. In addition, its non-GAAP adjusted net earnings and adjusted EPS came in at $7.36 billion and $2.80, reflecting increases of 6.5% and 8.1% year-over-year, respectively.
Street expects JNJ’s EPS and revenue to increase 4.9% and 5.2% year-over-year in the fiscal third quarter (ending September 2023) to $2.67 and $25.02 billion, respectively. Moreover, it surpassed the EPS estimates in each of the trailing four quarters.
The stock’s trailing-12-month gross profit margin of 67.17% is 20.8% higher than the 55.58% industry average. Likewise, its trailing-12-month EBITDA margin of 34.65% is significantly higher than the industry average of 3.93%.
JNJ’s shares have gained 6.2% over the past three months to close the last trading session at $172.72.
JNJ’s POWR Ratings reflect this promising outlook. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Stability and B for Growth, Value, Sentiment, and Quality. Among the 165 stocks in the Medical – Pharmaceuticals industry, it is ranked #3. Click here to see JNJ’s rating for Momentum.
Eli Lilly and Company (LLY)
LLY is a drug manufacturing industry that discovers, develops, and markets human pharmaceuticals worldwide. The firm’s product line consists of medicines for oncology, diabetes, immunology, neuroscience, and other products and therapies.
On July 14, LLY announced its plans to acquire Versanis Bio, a private clinical-stage biopharmaceutical company focused on the development of new medicines for the treatment of cardiometabolic diseases, through a definitive agreement.
This new development will entail LLY to continue to develop bimagrumab in combination with its portfolio of incretins to improve patient outcomes in cardiometabolic diseases.
On June 29, LLY announced the acquisition of Sigilon Therapeutics, Inc. (SGTX), a biopharmaceutical company that seeks to develop functional cures for patients with a broad range of acute and chronic diseases.
With this acquisition, LLY and its research and development team expect to enhance opportunities to create innovative islet cell therapy solutions to improve the care of people with diabetes.
On June 26, LLY declared a dividend for the third quarter of 2023 of $1.13 per share on outstanding common stock. This dividend is payable to its shareholders on September 8, 2023. The company’s four-year average dividend yield is 1.53%, and its forward annual dividend of $4.52 translates to a 1% yield on the current price level.
Its dividend payouts have grown at CAGRs of 15.1% and 14.3% over the past three and five years, respectively. Also, it has a record of eight years of consecutive dividend growth.
For the fiscal first quarter that ended on March 31, 2023, LLY’s revenue amounted to $6.96 billion. Excluding COVID-19 antibodies, its revenue increased 10% year-over-year, driven by volume growth from Mounjaro, Trulicity, Verzenio, and Jardiance. In the same period, its non-GAAP net income and EPS came in at $1.46 billion and $1.62, respectively.
In addition, the company raised its annual guidance for the fiscal year 2023, projecting revenue of approximately $31.2-$31.7 million compared to the prior projection of $30.3-$30.8 billion. Its non-GAAP EPS is expected to be in the range of $8.65 to $8.85, up by $0.30 from the prior projection.
Analysts expect LLY’s EPS to increase 60.4% year-over-year to $2 for the second quarter (ended June 30, 2023). Its EPS for the about-to-be-reported quarter is expected to increase 17.4% from the prior-year period to $7.61 billion.
LLYs trailing-12-month EBITDA margin of 33.06% is significantly higher than the industry average of 3.93%. Also, its trailing-12-month gross profit margin of 77.67% is 39.7% higher than the 55.58% industry average.
The stock has gained 36.8% over the past year to close the last trading session at $453.59.
LLY’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, translating to Buy in our proprietary rating system. It also has a B grade for Stability and Quality. Within the same industry, it is ranked #20.
Click here to see the other ratings of LLY for Growth, Value, Momentum, and Sentiment.
Dr. Reddy's Laboratories Limited (RDY)
Headquartered in Hyderabad, India, RDY operates as an integrated pharmaceutical company through four distinct segments: Global Generics; Pharmaceutical Services & Active Ingredients (PSAI); Proprietary Products and Others.
On May 5, the company launched Regadenoson Injection in the U.S. market, a generic therapeutic equivalent of Lexiscan (Regadenoson) injection, approved by the U. S. Food and Drug Administration (FDA). This new launch is expected to improve the blood flow in cardiac patients and help patients unable to undergo the exercise for their stress test.
In addition, on April 21, RDY also introduced Treprostinil Injection in the U.S. market, a therapeutic equivalent generic version of Remodulin® (treprostinil) Injection, approved by the FDA. Such introductions should benefit the company significantly in the long run regarding revenue and effective treatment options.
RDY’s four-year average dividend yield is 0.60%, and its current dividend of $0.49 translates to a 0.72% yield on prevailing prices. Its dividend payouts have grown at a 10.3% CAGR over the past three years and a 3.8% CAGR over the past five years.
During the first quarter (ended on June 30, 2023), RDY’s total revenue increased 29.2% year-over-year to ₹67.38 billion ($821.73 million), while its gross profit improved by 52.1% from the year-ago value to ₹39.55 billion ($482.34 million).
Its results from operating activities increased 44.4% year-over-year to ₹ 17.64 billion ($215.07 million). The company’s profit for the period improved by 18.1% from the prior-year quarter to ₹14.03 billion ($170.94 million). Also, its EPS stood at ₹84.22, up 17.9% year-over-year.
RDY’s revenue is expected to grow 12.9% year-over-year in the fiscal second quarter (ending September 2023) to reach $864.80 million. Its consensus revenue estimate of $3.36 billion for the fiscal year 2023 indicates an 11.6% increase year-over-year. Moreover, it surpassed the revenue estimates in each of the trailing four quarters, which is promising.
RDY’s trailing-12-month gross profit margin of 58.55% is 5.3% higher than the industry average of 55.58%. Also, its trailing-12-month EBITDA margin of 26.07% compares to the industry average of 3.93%.
Over the past year, the stock has gained 28.7% to close the last trading session at $68.05
It’s no surprise that RDY has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. It has an A grade for Stability and B for Value, Sentiment, and Quality. Out of 165 stocks in the same industry, it is ranked #7.
In addition to the POWR Ratings we’ve stated above, we also have RDY’s ratings for Growth and Momentum. Get all RDY’s ratings here.
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JNJ shares were trading at $174.00 per share on Thursday afternoon, up $1.28 (+0.74%). Year-to-date, JNJ has declined -0.04%, versus a 20.22% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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