Barring some outliers, the US large cap pharmaceutical group has underperformed the broader markets this year.
In a setting characterized by formidable macro factors, such as economic growth trends and the trajectory of interest rates, Goldman Sachs’ Chris Shibutani says the group has shown it is “unstable on a defensive basis.”
That has led to the overall lackluster performance in the market and has resulted in “steeper than average levels of relative valuation discounts.” For instance, while not quite at the level of the pandemic-era lows, global large cap pharma (again, sans some outliers) is currently trading substantially below the 10-year average historical discount to the S&P 500 of 14%.
But as is often the case, now is the time for savvy investors to take note. “Against this backdrop,” says the 5-star analyst, “the set-up into 2024 for US pharma could be viewed as attractive. A key factor in our view that could help propel healthier valuations remains the prospect of innovation, fueling new product cycles that have the potential to redefine market landscapes and growth trajectories.”
With this in mind, Shibutani has been pointing investors toward 3 healthcare giants with decent prospects ahead, so we decided to give them a closer look. All have underperformed this year, but Shibutani expects them to recover in 2024. To get an idea of what the rest of the Street makes of their chances, we also ran them through the TipRanks database. Here’s the lowdown.
Don’t miss
Merck & Company (MRK)
We’ll start with Merck, a leading pharmaceutical firm with global networks for both sales and research, wide-spread partnerships with other drug companies to facilitate research programs, and a market cap exceeding $264 billion. Merck’s name alone is worth plenty for reputation; the company created the wide-spread MMR vaccine that protects newborn infants against measles-mumps-rubella.
In today’s market, Merck is probably best-known for products like Gardasil, the widespread HPV vaccine that is used to protect women from virus-linked cervical cancers; Keytruda, the oncology-immunotherapy drug frequently used in the treatment of numerous malignancies; and Remicade, the biological anti-inflammatory drug used in the treatment of autoimmune conditions like Crohn’s or rheumatoid arthritis.
Merck’s global sales in 2022 totaled $59.3 billion, marking a 22% year-over-year increase. The company’s sales are lagging that pace slightly in 2023 – for the first nine months of this year, Merck’s total revenue comes to $45.66 billion, compared to $45.99 billion in the same period of last year. We should note that, year-to-date, Merck’s stock is down approximately 4%, an unfavorable comparison to the 20% year-to-date gain on the S&P 500.
At the same time, Merck’s report for 3Q23, the last released, shows solid year-over-year gains, with worldwide sales up 7% y/y to $16 billion, beating expectations by $730 million. The strong revenue was driven by solid sales in Keytruda (up 17% y/y), in Gardasil (up 13% y/y), and in the anti-COVID-19 drug Lagevrio (up 47% y/y). Quarterly sales for these three drugs totaled $9.54 billion. At the bottom line, Merck realized a non-GAAP earnings per share of $2.13, 18 cents better than had been expected.
For Shibutani, the key point to understand about Merck is the company’s overall sound position. He acknowledges that the firm will face loss of exclusivity (LOE) on several drugs in the near-term, but adds that it has both a solid portfolio of approved products and plenty of research projects in the pipeline. He says, “In an environment where end-of-decade LOEs remain a sticking point for much of US large cap pharma, we believe MRK has delivered effective superlative progress in terms of addressing concerns regarding the growth outlook for the company – through and beyond the Keytruda LOE. We further believe that MRK’s decision-making and execution on the business development front will increasingly be revealed as best-in-class amongst industry peers.”
For the near-term, and of interest to investors seeking an attractively priced entry point, Shibutani adds, “The relatively tempered share performance in the 2H23 has reflected in our view, the perception of a relative lack of headline generating catalysts. We see current levels as highly attractive, with the set-up for shares heading into 2024 framed by the opportunity for pipeline assets highlighted to become headliners, providing catalyst paths for a return to outperformance.”
All of this adds up to a Top Pick to go on Goldman’s Conviction List. The stock naturally gets a Buy rating, which Shibutani supplements with a $128 price target – implying a one-year upside potential of 23%. (To watch Shibutani’s track record, click here.)
The Strong Buy analyst consensus rating on Merck’s stock is based on 15 recent reviews that break down 13 to 2 in favor of Buy over Hold. The shares are trading for $104.36 and their $126.29 average price target suggests an increase of 21% in the coming 12 months. (See Merck’s stock forecast.)
AbbVie, Inc. (ABBV)
The second stock on our list of Goldman picks is AbbVie. This company has established itself as a leader in the research and development of biological anti-inflammatory medications, the class that has become prevalent in the treatment of autoimmune inflammatory disorders such as Crohn’s, ulcerative colitis, rheumatoid arthritis, and psoriasis. This puts AbbVie into direct competition with Merck’s Remicade.
We should note, however, that the market for such anti-inflammatory autoimmune drugs is both large and growing. According to Global Market Insights, it was thought to be worth $104 billion last year, and is expected to reach as high as $233.6 billion by 2032 – there is room here for both AbbVie and Merck to find customers. In addition, AbbVie has a larger portfolio of products in this niche, which has become something of a specialty for the company. AbbVie’s anti-inflammatory drugs include Humira, Skyrizi, and Rinvoq. The first of these was first approved for use in 2002, the latter two both in 2019.
AbbVie, which is based in North Chicago, Illinois, sees high potential for these drugs going forward – and the company, in its last quarterly report, revised its full-year 2023 earnings outlook upward accordingly, setting expectations for adjusted diluted EPS this year in the range of $11.19 to $11.23. This compares to the previous guidance of $10.86 to $11.06, and is well above the forecast number of $11.05.
Diving into that Q3 report, we find that AbbVie’s revenues and earnings in 3Q23 were both down y/y. The top line, showing revenue of $13.93 billion, was down 6%, while the bottom line, the adjusted diluted EPS of $2.95, was down more than 19%. Both figures beat expectations, however; revenue by $220 million and EPS by 8 cents per share. We should note here that shares in AbbVie have underperformed this year, and are down 2% overall.
In his write-up on AbbVie for Goldman, Shibutani takes an upbeat long-term view, basing his stance on the strength of the Humira-Skyrizi-Rinvoq stable of drugs. He writes, “As we exit 2023, ABBV’s delivery of more resilient than expected revenue performance for the Humira franchise in the face of multiple biosimilar entrants our confidence has increased in the potential for performance from growth products (Skyrizi, Rinvoq) and signature franchises (i.e., Botox) to generate an overall company growth profile heading through most of the remainder of the decade, that scales to management’s guidance, exceeds current Street expectations, and provides the basis for our view that ABBV’s current share price reflects underappreciation of the company’s improving growth outlook.”
This positive stance goes along with a Buy rating, an upgrade from Neutral, while Shibutani’s $173 price target points toward a one-year upside of 13%.
AbbVie has a Moderate Buy consensus rating from the Street, after picking up 13 recent analyst reviews, with 8 to Buy and 5 to Hold. The average target price of $170.25 suggests an increase of 11% from the current trading price of $153.24. (See AbbVie’s stock forecast.)
Pfizer (PFE)
We’ll wrap up this Goldman-backed list with Pfizer, the large-cap pharma that made headlines during the pandemic with its development of an early COVID-19 vaccine as well as the anti-viral drug Paxlovid. Pfizer, which boasts a $161 billion market cap, is one of the world’s premier biopharmaceutical firms. It has a long list of approved products on the market, and generated over $100 billion in revenue in 2022. The company defines its mission as creating a healthier world, and since the COVID pandemic, it has dedicated large resources to the combat of related highly contagious respiratory viral diseases.
In addition to its revenue-generating product lines, Pfizer has an active research pipeline that currently features 83 drug candidates in human clinical trials. Of these, 30 are at Phase 2, 23 are at Phase 3, and 4 are registrational, the final step before submitting applications for regulatory approval. The ‘areas of focus’ in Pfizer’s pipeline include anti-infectives and vaccines, inflammation and immunology, oncology, and rare diseases.
Leading-edge biotech research is a risky business, and Pfizer recently discontinued a clinical trial on a weight-loss drug, danuglipron. The drug had advanced through the Phase 2 stage – but while it achieved its primary endpoints in the study, there were high rates of side effects, including nausea and vomiting. The company chose not to pursue further research on this track.
That round of bad news comes after slowing sales year-to-date. Pfizer’s first three quarters this year all saw y/y declines in revenue. The company’s stock price reflects that – PFE is down 42% this year.
On a positive note, Pfizer received on December 12 regulatory approval from US government oversight agencies for its proposed merger-acquisition of the research-oriented biotech firm Seagen. The acquisition agreement is valued at $43 billion, and will add Seagen’s portfolio into Pfizer’s programs. Pfizer has said that it will create a dedicated cancer drugs operation from the expanded portfolio, and will split its business side into a US division and a global division.
Watching these developments, top analyst Shibutani notes first, that Pfizer’s share decline has tracked slowing sales of COVID-19 vaccines and treatments, and second, that there is reason for optimism here. He says, to start, “Acknowledging that PFE share performance has largely tracked expectations for sales from its COVID-19 franchise, we are constructive on the stock heading into 2024 following a material guidance reset in mid-October that, while negative and overdue, we believe better aligns management and investor expectations for Comirnaty (COVID-19 vaccine) and Paxlovid.”
Going on, Shibutani adds that Pfizer will be launching new products in the mid-term, and should expect returns from the Seagen deal: “Our positive outlook primarily derives from our view that COVID-19 revenues will be less debated on the forward, and we anticipate several of PFE’s bounty of new product launches will demonstrate success, heralded by commercial execution. We also believe that the potential closing of SGEN (expected by early 2024) and a return to a more balanced approach to capital allocation will represent a key strategic shift towards oncology and would achieve a significant portion of the company’s stated goal to acquire ~25bn in 2030 risk-adjusted revenue.”
With this in mind, Shibutani keeps his Buy rating on PFE, and although he has reduced his price target from $48 to $37, the new figure still indicates confidence in a 29% increase for the shares on the one-year horizon. (To watch Shibutani’s track record, click here.)
Turning now to the rest of the Street, where Pfizer gets a Moderate Buy consensus rating based on an additional 4 Buys and 8 Holds. The stock is selling for $28.58 and its $39.73 average price target implies a 39% increase from that level. (See Pfizer’s stock forecast.)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
Source: finance.yahoo.com