3 Pharma Stocks Surpassing Johnson & Johnson (JNJ)

The medical industry is expanding rapidly as the demand for healthcare products and services increases. Factors such as an aging population, technological breakthroughs, and increased healthcare awareness drive this expansion.

While popular pharma Johnson & Johnson (JNJ) has been an investor favorite for a long time, I believe Horizon Therapeutics Public Limited Company (HZNP), Dr. Reddy’s Laboratories Limited (RDY), and Novartis AG (NVS)  are better positioned to capitalize on the industry’s prospects now.

JNJ’s shares have lost 7.4% over the past nine months to close the last trading session at $162.66. However, the stock is trading at a premium valuation. Its forward EV/Sales multiple of 4.85 is 38.2% higher than the 3.51 industry average. Also, its forward Price/Sales multiple of 4.63 is 16.9% higher than the industry average of 3.96.

The company’s adjusted net earnings amounted to $7.36 billion, and adjusted EPS came in at $2.80, representing a 6.5% and 8.1% increase year-over-year during the second quarter.

Before diving into the fundamentals of HZNP, RDY, and NVS, let's discuss the prospects of the pharma industry.

The global pharmaceutical market is expected to reach $1.48 trillion by 2028, exhibiting a CAGR of 5.8%. Oncology Drugs is the industry’s largest segment, with an anticipated market volume of $188.20 billion in 2023.

This expansion is being driven by the rising prevalence of cancer and the discovery of novel medicines. Also, increased demand for personalized medicine and targeted therapy will likely drive the oncology pharmaceuticals market in the coming years.

Furthermore, according to Fortune Business Insights, the global US pharmacy industry is expected to reach $861.67 billion in 2028, growing at a CAGR of 6.3%.

With these favorable trends in mind, let’s delve into the fundamentals of the three best Medical – Pharmaceuticals stocks, beginning with number 3.

Stock #3: Horizon Therapeutics Public Limited Company (HZNP)

Based in Dublin, Ireland, HZNP is a biotechnology company that focuses on discovering, developing, and commercializing medicines that address the critical needs of people impacted by rare, autoimmune, and severe inflammatory diseases. Its portfolio comprises 12 medicines in the areas of rare diseases, gout, ophthalmology, and inflammation.

On September 1, 2023, HZNP and Amgen Inc. (AMGN) announced the entry into a consent order agreement with the Federal Trade Commission (FTC), helping resolve the pending FTC administrative lawsuit.

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.

HZNP’s forward non-GAAP PEG, HZNP’s 1.59x, is 19.6% lower than the 1.98x industry average.

HZNP’s trailing-12-month EBITDA margin of 18.36% is 256.2% higher than the 5.15% industry average. Its trailing-12-month levered FCF margin of 22.6% is significantly higher than the 0.23% industry average.

For the fiscal second quarter ended June 30, 2023, HZNP’s net sales rose 7.8% year-over-year to $944.96 million. Its non-GAAP net income increased 10.4% over the prior-year quarter to $280.06 million. The company’s adjusted EBITDA increased 4.5% year-over-year to $320.38 million. Its non-GAAP EPS came in at $1.20, representing an increase of 12.1% year-over-year.

The consensus revenue estimate of $3.69 billion for the year ending December 2023 represents a 4.5% increase year-over-year. Its EPS is expected to come in at $4.53 for the same period. It surpassed the EPS estimates in three of the trailing four quarters. HZNP’s shares have gained 73.6% over the past year to close the last trading session at $114.75.

HZNP’s POWR Ratings reflect this promising outlook. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

HZNP has a B grade for Growth, Value, and Quality. Within the Medical – Pharmaceuticals industry, it is ranked #10 out of 162 stocks. Click here for the additional POWR Ratings for Sentiment, Momentum, and Stability for HZNP.

Stock #2: 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 August 10, 2023, RDY announced the launch of Saxagliptin and Metformin Hydrochloride Extended-Release Tablets in the United States, a therapeutic comparable generic version of the FDA-approved KOMBIGLYZE® XR tablets. This is good news for the company.

RDY ’s forward EV/Sales multiple of 3.24 is 7.2% lower than the industry average of 3.49. Its forward EV/EBIT multiple of 14.66 is 12.5% lower than the industry average of 16.75.

RDY’s trailing-12-month EBIT margin and levered FCF margins of 28.27% and 11.21% are 448.4% and significantly higher than the industry averages of 5.15% and 0.23%, respectively.

In the fiscal first quarter that ended June 30, 2023, RDY’s revenues increased 29.1% year-over-year to $821 million, while its gross profit improved by 52.1% from the year-ago value to $482 million. The company’s profit for the period improved by 17.9% from the prior-year quarter to $171 million, while its earnings per share stood at $1.03, up 18.4% year-over-year.

Analysts expect RDY’s revenue to increase 9% year-over-year to $3.28 billion for the year ending March 2024. Its EPS is expected to grow 3.4% year-over-year to $3.46 for the same period. It has surpassed EPS estimates in all four trailing quarters. Over the past six months, the stock has gained 27.8% to close the last trading session at $68.28.

It’s no surprise that RDY has an overall A rating, equating to a Strong Buy in our POWR Ratings system. It has a B grade for Value, Stability, Sentiment, and Quality. It is ranked #5 in the same industry.

Beyond what is stated above, we’ve also rated RDY for Growth and Momentum. Get all RDY ratings here.

Stock #1: Novartis AG (NVS)

NVS, based in Basel, Switzerland, is a global healthcare company with two main segments: Innovative Medicines, which offers prescription drugs across various therapeutic areas, and Sandoz, which specializes in manufacturing pharmaceuticals and biotechnology products.

On August 28, 2023, NVS’ Sandoz division announced that it had completed acquiring brand rights for systemic antifungal agent Mycamine® (micafungin sodium, Funguard® in Japan) from Astellas. This is expected to boost the company’s portfolio.

On August 11, 2023, NVS announced the successful acquisition of Chinook Therapeutics, a biopharmaceutical company specializing in precision medicines for kidney diseases, in a deal worth up to $3.5 billion. This should enhance the company’s renal portfolio.

NVS’ forward EV/EBITDA multiple of 11.57 is 11.9% lower than the industry average of 13.13. Its forward EV/EBIT multiple of 12.38 is 26.8% lower than the industry average of 16.92.

NVS’ trailing-12-month net income margin of 37.74% is 632.1% higher than the 5.15% industry average. Its trailing-12-month levered FCF margin of 22.44% is significantly higher than the 0.23% industry average.

For the fiscal second quarter, NVS’ net sales increased 6.6% year-over-year to $13.62 billion, while its operating income increased 31.1% year-over-year to $2.92 billion. Its core net income and core EPS stood at $3.81 billion and $1.83, registering increments of 11.1% and 17.3% from prior-year values, respectively.

Street expects NVS’ revenue to increase 7.5% year-over-year to $54.35 billion for the year ending December 2023. Its EPS is expected to grow 12.1% year-over-year to $6.86 for the same period. It has surpassed EPS estimates in three of four trailing quarters. Over the past six months, the stock has gained 23% to close the last trading session at $99.24.

NVS’ strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.

It is ranked first in the same industry. It has an A grade for Growth and Stability and a B grade for Quality, Value, and Sentiment. To see additional NVS’ ratings for Momentum, click here.

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NVS shares were trading at $100.64 per share on Tuesday afternoon, up $1.40 (+1.41%). Year-to-date, NVS has gained 14.05%, versus a 17.87% rise in the benchmark S&P 500 index during the same period.

Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.

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