The pharmaceutical business sub-sector is categorized under the larger healthcare sector. Companies in the pharmaceutical sub-sector derive their business by researching, discovering, developing, manufacturing, and marketing pharmaceutical medicines and drugs.
Pharma Drug Products
Medications and drugs may be generic, such as those used for common ailments like the flu and colds, or branded, patented drugs used for treating rare diseases including certain types of cancers. Medications are used to treat patients in a curative manner after the subject has contracted the disease, or they are used for preventive reasons such as vaccination to avoid the disease. Medications are also used to provide comfort by alleviating certain symptoms.
During 2018, there were significant developments in the pharmaceutical sector. One such development was the approval of the first ribonucleic acid (RNA) interference remedy Onpattro, the progress of the gene-editing technology called CRISPR, a larger industry-wide interest in oncolytic viruses that selectively infect and kill cancer cells, and progress in the development of gene therapies for a more comprehensive array of ailments. While these developments helped to bring in a flood of investment by major players in the pharmaceutical sector, the overall sectoral performance was lackluster. The leading pharmaceutical sector market index - S&P Pharmaceuticals Select Industry Index – generated negative returns of (-16.87) percent during 2018. The index started the year on January 2, 2018, at a closing value of 5,082 and ended at a value of 4,225 on December 31, 2018.
This article covers the performance of the top pharmaceutical sector stocks going into 2019. The list is composed of stocks that belong to the pharmaceutical sector, are part of the larger S&P 500 index, and have a market cap of at least $1 billion. The list is in descending order of the top performing stocks based on the percentage gains realized between January 2, 2018, and December 31, 2018, as calculated from the closing stock prices on the two days. The performance of individual stocks has been compared against the performance of the S&P Pharmaceuticals Select Industry Index. The market caps are as of April 2019.
Top 6 Pharmaceutical Stocks
1. Eli Lilly & Co. (LLY)
· Market Cap: $124.73 billion
· Performance: 35.6% annual return
2. Merck & Co., Inc. (MRK)
· Market Cap: $196.84 billion
· Performance: 34.5% annual return
3. Pfizer Inc. (PFE)
· Market Cap: $227.87 billion
· Performance:18.7% annual return
4. Zoetis Inc. (ZTS)
· Market Cap: $48.98 billion
· Performance: 17.7% annual return
5. Johnson & Johnson (JNJ)
· Market Cap: $375.67 billion
· Performance: -7.3% annual return
6. AbbVie Inc. (ABBV)
· Market Cap: $116.53 billion
· Performance: -9.33% annual return
The Indianapolis, Indiana-based Eli Lilly is a global pharmaceutical company with a 142-year-long record in researching, creating, and marketing high-quality medicines. With offices in 18 different countries and business operations spanning more than 125 countries across the globe, the company operates through four dedicated business segments – oncology, bio-medicines, diabetes, and international.
The stellar performance by the company in 2018 was driven by the robust demand for its new drugs. They include the diabetes treating drugs Trulicity and Basaglar, immunology medicine Taltz, migraine-preventing drug Emgality, and the cancer treatment drug Verzenio. Although the company’s revenues were hit by the loss of exclusivity (LOE) on several drugs including Axiron, Cialis, Cymbalta, Effient, Evista, Strattera, and Zyprexa, the stock price received a boost because of potential for increasing sales of its newer drugs. Lilly’s successfully spun off of its animal health unit Elanco through a $1.5 billion IPO that caused a jump in the share price of 38% gain on the first day of listing.
The healthy financial guidance announced in December helped the company end the year on a high note. The company expects to divest its remaining stake in Elanco Animal Health by the end of 2019 and expects 45% of human pharmaceutical sales in 2019 to come from the 10 drugs it launched during the last five years.
The Kenilworth, New Jersey-based Merck is an American pharmaceutical company which has been inventing drugs and vaccines for more than 125 years. Its work spans across the areas of vaccines, oncology, diabetes, cardiovascular and sleep-related ailments, infectious diseases like HIV and Hepatitis C, and animal health.
The 80% growth registered in the sale of its key cancer drug Keytruda, according to Barrons, helped Merck take the number two spot in the coveted list of best-performing pharma stocks of 2018. In addition to the drug being considered for treating multiple forms of cancers, clinical trials to use it in combination with other drugs are also underway indicating the potential of these new products. During the first half of the year, company revenues jumped 6% while earnings per share (EPS) rose around 12%. Other drugs that supported Keytruda through robust sales were Bridion and Gardasil, although the company suffered from a loss of exclusivity for some of its products, limited revenues from diabetes products, and competition for Zostavax (herpes zoster virus vaccine), and Zepatier (hepatitis C therapy).
Going into 2019, Merck has a robust pipeline of drugs to treat refractory chronic cough, chronic heart failure, bacterial infections, and vaccines for Ebola and pneumonia.
The share price of the 169-year old, New York city-headquartered U.S. pharmaceutical corporation hit a 10-year high price in late August and continued its bull run until early December. Riding high on the stellar sales of pneumococcal vaccine Prevnar 13 and blood clot-preventing drug Eliquis, the company managed to beat street expectations for the second quarter results announced at the end of July. Major updates on the regulatory front and clinical trials also boosted the stock price. Pfizer’s biosimilar product Neupogen, which is used to increase white blood cells, and the drug Xtandi received approval for the treatment of non-metastatic prostate cancer from the U.S. Food and Drug Administration (FDA). The company's early-state breast cancer drug Herceptin and ulcerative colitis drug Xeljanz also secured approval in the European Union.
Going into 2019, the company expects an FDA decision on tafamidis, a treatment for progressive heart damage. Xtandi, Bavencio, Ibrance, and Xeljanz continue to be tested for the treatment of additional indications. While the company will lose revenue due to LOE on the pain treating medication Lyrica, another promising pain treating candidate, Tanezumab, is being developed in collaboration with Eli Lilly.
Deriving its name from the word “zoo,” Zoetis is a global animal health company that develops medicines, vaccines, diagnostic products, bio-devices, genetic tests, and a range of other services. The company has been in operation for more than 60 years and conducts business in over 100 countries.
In 2018, according to Zacks, the company surpassing expectations in all four quarters in terms of earnings. Additionally, the company's stock outperformed the industry rallying at 19.4% versus an industry decline of 16.4%. Revenue for Zoetis grew by 7% in 2018.
In 2019, the company expects revenues to grow to $6.12 to $6.3 billion from $5.8 billion in 2018.
Johnson & Johnson
Established in 1886, Johnson & Johnson is a U.S.-based pharmaceutical, medical device, and consumer packaged goods manufacturing company. Its pharmaceuticals business spans the areas of cardiovascular and metabolism, immunology, infectious diseases and vaccines, neuroscience, oncology, and pulmonary hypertension.
Johnson & Johnson had a rough ride in 2018. The company started the year on a negative note when adverse market conditions and changes in tax laws caused the stock price to plummet. The company benefited at the start of the second quarter with strong sales of the prostate cancer therapy Zytiga and the anti-immune biologic drug Stelara. The share price bounced back in the second quarter as healthy demand increased the sale of its key drugs, a development which was supported by a rise in sales of its consumer products and medical devices. However, concerns remain that the company is too dependent on its pharmaceutical segment at the expense of consumer products and medical devices.
Reports in mid-December that the company’s management was long aware of safety concerns linked to Johnson & Johnson’s talcum powder products led the stock to give up all YTD gains and end the year with net negative returns. While the company is expected to face competition by biosimilars, the prostate cancer drug Erleada and other oncology drugs such as Darzalex and Imbruvica are expected to remain future growth drivers over the next few years.
Originally a spin-off from Abbott Laboratories in 2013, the North Chicago, Illinois-based AbbVie is a leading research-driven U.S. biopharmaceutical company. It is in the business of discovering, developing and delivering drugs across therapeutic areas of immunology, oncology, neuroscience, virology, and general medicine.
Company’s flagship autoimmune Humira drug is considered the world’s number one drug in terms of annual sales of $20 billion and accounts for more than 60 percent of AbbVie’s revenues. However, the company faced the loss of revenue from Humira biosimilars, which were launched in the EU in October although AbbVie has patent protection in the United States until 2023. Though AbbVie returned an average of -14.5% during 2018, the company outperformed the pharmaceutical benchmark index.
AbbVie has a healthy pipeline of drugs expected to hit the markets by 2020, with more than 10 drugs in the last stage of clinical trials. The company looks forward to securing approval in 2020 for Orilissa, the first new therapy for endometriosis pain. Other candidates include psoriasis drug risankizumab expecting FDA decision in April 2019 and rheumatoid arthritis candidate upadacitinib.
Performance of Pharma Stocks in 2018
Graph Courtesy: Yahoo! Finance
Pharmaceutical Sector Wrap up
Although the benchmark S&P Pharmaceuticals Select Industry Index has generated negative returns for 2018, it began 2019 on a strong positive note. As of writing, the sector index is up by more than 8 percent since the beginning of the year.
The primary market saw pharmaceutical IPOs raising a record $7.8 billion during 2018, including Moderna Therapeutics Inc. which raised more than $600 million, according to Fortune. The drug sector faced uncertainty around tax laws and political bashing over high drug prices during 2018 and this criticism is expected to continue in 2019. New cancer therapies should be approved by the U.S. FDA for different indications, and established branded drugs will continue to face competition from biosimilars and generics. Larger players sitting with cash on hand are expected to assimilate assets of smaller, innovative companies at more attractive valuations.