Decoding Pharma Stocks: Analyzing the Buy Potential of MDGL, MRK, and LLY

Despite the pharmaceutical industry’s reputation for resilience amid economic turbulence, investments in pharmaceutical companies have dipped below historical levels over the past two years.

However, rising U.S. Food and Drug Administration (FDA) approvals, the increasing number of chronic diseases, and robust demand for the latest innovative weight-loss drugs have heightened the industry’s allure among investors. In 2023, the FDA approved almost 50% more novel drugs compared to 2022, restoring approval rates to historical levels.  

Meanwhile, approvals for innovative therapies featuring an active ingredient or molecule not previously sanctioned increased to 55 in 2023, a rise from 37 in 2022 and 51 in 2021. Analysts and investors believe these improvements could potentially trigger increased investments in firms operating in the industry.

Furthermore, the huge demand for the industry’s latest groundbreaking weight loss drug could prove to be highly profitable for the industry in the forthcoming years. Goldman Sachs analysts project that the number of U.S. adults utilizing obesity medications will reach a staggering 15 million by the year 2030.

Given such robust demand, drug-manufacturing companies are racing to enter the lucrative market of widely sought-after weight loss drugs that could accrue a value of tens of billions within a decade.

Buoyed the bright industry prospects, during the fourth quarter of 2023, family offices representing billionaire Waltons and George Soros made their mark in the biotechnology sector, enticed by the growing appeal of drug developers among affluent investors.

Soros Fund Management capitalized on this trend by acquiring a new stake worth $19.20 million in Eli Lilly and Company (LLY) and also made a significant investment of $24.50 million in Merck & Co., Inc. (MRK). Meanwhile, the Walton Investment Team secured a $8.20 million position in Madrigal Pharmaceuticals, Inc. (MDGL).

Therefore, let’s analyze why LLY, MRK, and MDGL could be potential buys.

Eli Lilly and Company (LLY)

Boasting a market cap of over $700 billion, pharma giant LLY has captured the spotlight, drawing attention from both retail and institutional investors alike. This fervor stems from the resounding success of its revolutionary weight-loss drugs, Mounjaro and Zepbound.  

Within a year of initiating treatment for obesity, 42.3% of individuals receiving tirzepatide, the key component in Mounjaro and Zepbound, experienced a weight loss of at least 15%. Responding to the high demand for these weight-loss medications, LLY launched its direct-to-consumer (DTC) platform named "LillyDirect" last month.

Through this website, individuals can directly order from the pharmaceutical company, including its weight-loss medication Zepbound, and access connections with telehealth companies for conditions like obesity.

Moreover, the company’s fourth-quarter performance revealed solid growth in both topline and bottom-line figures. Its total revenue reached $9.35 billion, reflecting a 28.1% year-over-year surge.

Notably, revenue from Mounjaro, LLY’s top-selling product, witnessed a staggering 689.9% year-over-year rise, underscoring the solid demand for the drug. Meanwhile, Zepbound, which was launched in November 2023, registered a revenue of $175.80 million.

In light of the overwhelming demand for its weight-loss pipeline, LLY's market capitalization surged, surpassing that of Tesla, Inc. (TSLA), thereby solidifying its position among the top 10 most valuable companies in the S&P 500 Index.

The stock’s relentless success has sparked speculation among analysts about the possibility of it becoming the first biopharmaceutical company to reach a market value of $1 trillion.

Such considerable advances, along with the LLY’s addition to Soro Fund’s equity portfolio, signify a robust endorsement of confidence in the company.

Merck & Co., Inc. (MRK)

With a strong market cap of over $323 billion and a roughly 24% surge in its shares over the past three months, a global healthcare company, MRK offers a diverse range of human health pharmaceutical products spanning oncology, hospital acute care, immunology, neuroscience, virology, cardiovascular, and diabetes.

In its most recent earnings, the company's top-selling cancer drug Keytruda generated a remarkable revenue of $6.61 billion, up 21% year-over-year, while its HPV vaccine Gardasil brought in an impressive $1.87 billion in revenue, reflecting a 27% year-over-year rise.

MRK’s Chairman and Chief Executive Officer, Robert M. Davis, expressed immense satisfaction with the company's performance throughout last year. He highlighted MRK's significant reach, with its medicines impacting over 500 million people. Additionally, the company invested approximately $30 billion in research and development last year to drive forward the discovery and development of impactful innovations in collaboration with others.

With oncology as its primary focus, MRK recently announced its decision to acquire Harpoon Therapeutics, Inc. for an approximate total equity value of $680 million. This strategic move is anticipated to complement MRK’s existing portfolio and drive forward innovative scientific breakthroughs to serve individuals better worldwide battling cancer.

On top of it, the company is actively exploring avenues to diversify its product portfolio and could possibly venture into the burgeoning market of weight-loss drugs.

Its experimental GLP-1 drugs, initially developed to treat non-alcoholic fatty liver disease, have shown unforeseen indications of weight loss. Alongside targeting weight loss, the pharmaceutical company is also pursuing therapies that provide benefits for diabetes and other disorders.

Soros Fund's investment in MRK could bolster the pharma company’s growth strategies and R&D initiative. The investment signals its confidence in MRK’s performance and prospects. Furthermore, MRK's exceptional track record of dividend payouts may infuse more investor confidence in its stock performance.

Madrigal Pharmaceuticals, Inc. (MDGL)

MDGL is a pre-revenue clinical-stage pharmaceutical company developing novel drugs to address major unmet needs in cardiovascular, metabolic, and liver diseases. Over the past six months, the stock has jumped over 27%.

The company’s lead compound, resmetirom, is being advanced for non-alcoholic steatohepatitis (NASH), a liver disease that commonly affects people with metabolic diseases such as obesity and diabetes, and non-alcoholic fatty liver disease (NAFLD).

 

MDGL’s positive findings from the Phase 3 MAESTRO-NASH trial last year November demonstrate the potential effectiveness of resmetirom in treating NASH with liver fibrosis, addressing a critical unmet medical need. It is also close to being commercialized. These promising results could not only validate the company's research and development efforts but also have the potential to bolster investor confidence.

MDGL’s latest quarterly report revealed losses of $98.74 million and $5.44 per share, while its research and development expenses rose 3.9% year-over-year. Nevertheless, analysts foresee the company experiencing a final loss in fiscal year 2024 before rebounding with positive profits of $57 million in fiscal year 2025.

Also, as of September 30, 2023, its cash and cash equivalents stood at $62.06 million. However, total operational costs outpaced this liquidity by reaching $263.32 million, of which a significant $201.71 million was research and development expenses.

The company's financial capabilities may hinder certain research initiatives along with corresponding clinical expenses and curtail investment in commercial readiness. This could necessitate fundraising efforts to propel R&D or even propel commercialization strategies for its pharmaceutical product lines.

So, Walton Investment's stake in MDGL serves as a strong endorsement of the pharma giant's potential and growing portfolio. This move undoubtedly bolsters the standing of MDGL’s stocks in the market.

Bottom Line

Overall, the pharmaceutical industry remains dynamic, with companies deftly maneuvering evolving market trends and seizing opportunities for growth and innovations. Thus, investors could consider keeping an eye on the shares of LLY, MRK, and MDGL for potential gains.

5 Stocks to Buy Now in Response to Rising Unemployment Rate

The recently released August jobs report signaled a cooling down of the robust U.S. job market. With the strong job growth since last year acting as an Achilles heel for the Fed, the benchmark interest rate was raised several times to control inflation.

Although nonfarm payrolls beat estimates of 170,000 to arrive at 187,000 in August, the unemployment rate was 3.8%, rising sequentially to the highest since February 2022. Moreover, the real unemployment rate peaked at 7.1%, increasing by 0.4% and marking the highest since May 2022. Furthermore, the nonfarm payrolls for June and July were revised considerably downward.

The healthcare sector showed the most significant job gain, adding 71,000 jobs. The latest Job Opening and Labor Turnover Survey (JOLTS) report released last week showed that job openings fell to their lowest since March 2021, indicating softness in the labor market. The JOLTS report showed that there were 8.82 million jobs open at the end of July, a decline from the 9.16 million job openings in June.

Wells Fargo Economics senior economist Sarah House said, “Job openings per unemployed person remain above pre-pandemic levels, but this indicator is clearly on a downward trajectory amid cooling labor demand growth and impressive labor supply growth. A normalizing quit rate suggests that the fight over workers is subsiding, at least at the aggregate level.”

The Bureau of Economic Analysis (BEA) revealed that the real gross domestic product (GDP) rose at an annual rate of 2.1% in the second quarter. The latest estimate was lower than the initial advance estimate of a 2.4% growth.

Wells Fargo economist Shannon Seery said, “Overall, there were not any major revisions to the underlying GDP components compared to the first estimate of output, and today’s data do not materially change our overall view of the economy. Incoming data for Q3 show an economy that has continued to expand but with signs of some moderation. We continue to expect the economy to gradually slow during the second half of the year.”

Amid the rise in unemployment and an expected economic slowdown during the second half of the year, investors could consider investing in the healthcare sector as it is relatively stable compared to other sectors. The sector's inelastic demand enables companies in this space to maintain their profit margins irrespective of economic cycles.

Considering these factors, fundamentally strong healthcare stocks Eli Lilly and Company (LLY), Johnson & Johnson (JNJ), Merck & Co., Inc. (MRK), Pfizer Inc. (PFE), and Amgen Inc. (AMGN) could be solid portfolio additions now.

Let’s discuss the fundamentals of these stocks.

Eli Lilly and Company (LLY)

LLY discovers, develops, and markets human pharmaceuticals worldwide. It offers Basaglar, Humalog, Humalog Mix 75/25, Humalog U-200, Humalog Mix 50/50, insulin Iispro, insulin Iispro protamine, insulin Iispro mix 75/25, Humulin, Humulin 70/30, Humulin N, Humulin R, and Humulin U-500 for diabetes; and Jardiance, Trajenta, and Trulicity for type 2 diabetes.

On August 14, 2023, LLY announced the acquisition of Versanis Bio. The acquisition will expand LLY’s portfolio to include Versanis’ lead asset, bimagrumab, which is undergoing a Phase 2b study alone and in combination with semaglutide in adults living with overweight or obesity.

Ruth Gimeno, Ph.D., group vice president diabetes, obesity, and cardiometabolic research at LLY, said, “Combining our current incretin portfolio, including tirzepatide, with activin receptor blockers such as bimagrumab, could be the next major step in innovative treatments for those living with cardiometabolic diseases, like obesity.”

“The wealth of knowledge that our new colleagues from Versanis will bring to Lilly will propel our research and development efforts forward, ultimately benefiting patients around the world,” she added.

In terms of the trailing-12-month EBITDA margin, LLY’s 33.08% is 532.9% higher than the 5.23% industry average. Likewise, its 17.13% trailing-12-month levered FCF margin is significantly higher than the industry average of 0.22%. Furthermore, its 8.55% trailing-12-month Capex/Sales is 89.4% higher than the 4.52% industry average.

LLY’s revenue for the second quarter ended June 30, 2023, increased 28% year-over-year to $8.31 billion. The company’s non-GAAP gross margin increased 28% year-over-year to $6.63 billion. Its non-GAAP net income rose 68.3% over the prior-year quarter to $1.90 billion. Also, its non-GAAP EPS came in at $2.11, representing an increase of 68.8% year-over-year.

Analysts expect LLY’s EPS and revenue to increase 47% and 27.1% year-over-year to $2.91 and $8.82 billion, respectively. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 80.2%.

Johnson & Johnson (JNJ)

JNJ researches, develops, manufactures, and sells various products in the healthcare field worldwide. It operates under three segments: Consumer Health, Pharmaceutical, and MedTech.

On August 10, 2023, JNJ’s The Janssen Pharmaceutical Companies announced that the U.S. FDA had granted accelerated approval of TALVEY (talquetamab-tgvs), a first-in-class bispecific antibody for the treatment of adult patients with relapsed or refractory multiple myeloma who have received at least four prior lines of therapy, including a proteasome inhibitor, an immunomodulatory agent, and an anti-CD38 antibody.

In terms of trailing-12-month gross profit margin, JNJ’s 67.50% is 21.7% higher than the 55.44% industry average. Likewise, its 0.53x trailing-12-month asset turnover ratio is 41.1% higher than the industry average of 0.38x. Furthermore, the stock’s 21.99% trailing-12-month levered FCF margin is significantly higher than the 0.22% industry average.

For the second quarter ended June 30, 2023, JNJ’s reported sales rose 6.3% year-over-year to $25.53 billion. Its gross profit rose 7.6% year-over-year to $17.32 billion. The company’s adjusted net earnings increased 6.5% over the prior-year quarter to $7.36 billion. In addition, its adjusted EPS came in at $2.80, representing an increase of 8.1% year-over-year.

Street expects JNJ’s EPS for the quarter ending December 31, 2023, to increase 8.6% year-over-year to $2.55. Its fiscal 2024 revenue is expected to increase 3.8% year-over-year to $87.79 billion. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past six months, the stock has gained 5.2%.

Merck & Co., Inc. (MRK)

MRK is a global healthcare company that offers solutions through its prescription medicines, vaccines, biologic therapies, and animal health products. The company operates in the Pharmaceutical and Animal Health segments.

On June 16, 2023, MRK announced the completion of the acquisition of Prometheus Biosciences (RXDX). 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 trailing-12-month gross profit margin, MRK’s 73.22% is 32.1% higher than the 55.44% industry average. Likewise, the stock’s 7.28% trailing-12-month Capex/Sales is 61.3% higher than the 4.52% industry average. Furthermore, its 0.55x trailing-12-month asset turnover ratio is 46.9% higher than the industry average of 0.38x.

MRK’s sales for the second quarter ended June 30, 2023, increased 3% year-over-year to $15.04 billion. Its non-GAAP net loss that excludes certain items came in at $5.22 billion, compared to a non-GAAP net income of $4.74 billion in the year-ago quarter. Also, its non-GAAP loss per share came in at $2.06, compared to a non-GAAP EPS of $1.87 in the prior-year quarter.

For the quarter ending September 30, 2023, MRK’s EPS and revenue are expected to increase 4.7% and 1.8% year-over-year to $1.94 and $15.22 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 26%.

Pfizer Inc. (PFE)

PFE discovers, develops, manufactures, markets, distributes, and sells biopharmaceutical products worldwide. It offers medicines and vaccines in various therapeutic areas, including cardiovascular metabolic and women's health, biosimilars, sterile injectable and anti-infective medicines, and oral COVID-19 treatment.

On August 21, 2023, PFE announced that the U.S. FDA approved ABRYSVO (Respiratory Syncytial Virus Vaccine), its bivalent RSV prefusion F (RSVpreF) vaccine, for the prevention of LRTD and severe LRTD caused by RSV in infants from birth up to six months of age by active immunization of pregnant individuals at 32 through 36 weeks gestational age.

PFE’s 32.53% trailing-12-month EBIT margin is significantly higher than the 0.15% industry average. Its 69.82% trailing-12-month gross profit margin is 25.9% higher than the industry average of 55.44%. Furthermore, the stock’s 15.85% trailing-12-month levered FCF margin is considerably higher than the industry average of 0.22%.  

PFE’s revenues for the second quarter ended June 30, 2023, declined 54% year-over-year to $12.73 billion. The company’s adjusted income decreased 67.1% year-over-year to $3.84 billion. Its adjusted EPS came in at $0.67, representing a decline of 67.2% over the prior-year quarter.  

PFE’s EPS and revenue for fiscal 2024 are expected to increase 3.9% and 0.1% year-over-year to $3.43 and $66.54 billion, respectively. It has an impressive earnings surprise history, surpassing its consensus EPS estimates in each of the trailing four quarters. Over the past month, the stock has gained 0.5%.  

Amgen Inc. (AMGN)

AMGN discovers, develops, manufactures, and delivers human therapeutics worldwide. It focuses on inflammation, oncology/hematology, bone health, cardiovascular disease, nephrology, and neuroscience.  

On September 1, 2023, AMGN and Horizon Therapeutics Public Limited Company (HZNP) announced the entry into a consent order agreement with the Federal Trade Commission (FTC), helping resolve the pending FTC administrative lawsuit. This effectively clears AMGN’s path to close the acquisition of HZNP.

With the consent order agreement, AMGN and HZNP expect that the parties will jointly file stipulated proposed orders to dismiss the preliminary injunction motion and dissolve the temporary restraining order in the U.S. District Court for the North District of Illinois. Both companies will seek the final approvals required under Irish law to close the acquisition.

In terms of the trailing-12-month gross profit margin, AMGN’s 74.29% is 34% higher than the 55.44% industry average. Likewise, its 37.82% trailing-12-month levered FCF margin is significantly higher than the industry average of 0.22%. Furthermore, its 51.78% trailing-12-month EBITDA margin is 890.5% higher than the 5.23% industry average.

For the fiscal second quarter ended June 30, 2023, AMGN’s total revenues increased 5.9% year-over-year to $6.99 billion. Its non-GAAP operating income rose 5.4% over the prior-year quarter to $3.52 billion. The company’s non-GAAP net income increased 7.5% year-over-year to $2.68 billion. Also, its non-GAAP EPS came in at $5, representing an increase of 7.5% year-over-year.

Street expects AMGN’s revenue for the quarter ending September 30, 2023, to increase 4% year-over-year to $6.92 billion. Its EPS for the quarter ending December 31, 2023, is expected to increase 15% year-over-year to $4.70. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past three months, the stock has gained 19.8%.

Health Care Stocks You'll Wish You Bought Sooner

The latest inflation data has further aggravated recession worries. With inflation still hovering near its multi-decade high, the odds of the Fed proceeding with its fourth consecutive 75-bps interest rate hike are pretty high. The consequent increase in recession fears has dampened the market sentiment significantly.

However, healthcare companies enjoy demand and margins resistant to inflation and recession. The inelastic demand for healthcare products helps these companies generate stable revenues regardless of inflationary pressures and consumers’ spending cuts amid a recession.

Moreover, the demand for healthcare products and services could rise further due to the increased need to serve aging Baby Boomers and the increasing frequency and severity of chronic conditions.

According to a report published by Health Affairs, national health spending is expected to reach $6.8 trillion by 2030.

Hence, given ongoing macroeconomic turbulence and uncertain outlook, one could make the most of the strong uptrend in healthcare stocks Eli Lilly and Company (LLY), Merck & Co., Inc. (MRK), and Biogen Inc. (BIIB) by investing in them.

Eli Lilly and Company (LLY)

LLY discovers, develops, and markets human pharmaceuticals worldwide. With a market capitalization of $314.88 billion, the company provides diabetes, oncology, neuroscience, and other products.

Over the last three years, LLY has grown its revenue at a 10.3% CAGR, while the company’s EBITDA has grown at a 13.3% CAGR.

For the second quarter of the fiscal year 2022 ended June 30, 2022, LLY’s worldwide revenue stood at $6.49 billion. Excluding revenue from Alimta, the sale of the company's rights to Cialis in China in Q2 2021, and COVID-19 antibodies, the company’s revenue grew 6% year-over-year. LLY’s operating income and net income came in at $1.21 billion and $952.50 million, respectively. Its non-GAAP EPS came in at $1.25.

The consensus revenue estimate of $30.30 billion for fiscal 2023, ending September 2023, represents a 5.2% improvement year-over-year. Also, Street expects LLY’s EPS to grow 16.3% year-over-year to $9.28 during the same period.

LLY’s stock is trading at a premium, indicating high expectations regarding the company’s performance in the upcoming quarters. Regarding forward P/E, LLY is trading at 41.69x, 122.7% higher than the industry average of 18.7x. Also, it is trading at a forward Price/Sales multiple of 10.98 compares to the industry average of 4.25. Continue reading "Health Care Stocks You'll Wish You Bought Sooner"