The pharmaceutical sector is poised for sustained expansion in the foreseeable future, propelled by factors such as the aging demographic, growing chronic illnesses, and technological advancements. Given the backdrop, in this article, we explore the fundamentals of three pharma stocks, Eli Lilly and Company (LLY), Zoetis Inc. (ZTS), and Taro Pharmaceutical Industries Ltd. (TARO), which are being followed by smart money.
According to a report by the IQVIA Institute, the total spending and global demand for medicines will increase to approximately $1.90 trillion by 2027, registering an underlying growth rate of 3-6% in spending. The market is set to be driven by drug launches and wider use of medicines.
On top of it, advancements in technology and heightened investment have collectively brought about a notable transformation in the pharmaceutical industry. For instance, Asad Haider, head of the healthcare business unit at Goldman Sachs Research, highlights significant advancements in innovation and an upward trend in surgical procedure volumes.
According to a midyear investor survey conducted alongside Goldman Sachs' 44th annual Global Healthcare Conference, it is expected that MedTech will emerge as the top-performing subsector within the industry during the second half of the year. This reflects investor optimism about healthcare industry opportunities.
Advanced technologies, such as Artificial Intelligence (AI) and imaging technology, have reduced the time required for drug discovery. The global drug discovery market is expected to reach $158.67 billion in 2027, growing at a CAGR of 12.7%.
In light of such encouraging trends and projections, let’s dive into the fundamentals of the featured Medical – Pharmaceuticals industry picks, beginning with number 3.
Stock #3: Eli Lilly and Company (LLY)
LLY discovers, develops, and markets human pharmaceuticals worldwide. The company’s products are used for the treatment of various medical conditions like non-small cell lung cancer and malignant pleural mesothelioma, gastric cancer, breast cancer, thyroid cancer, and more.
LLY has a significant institutional ownership presence, with institutions holding around 82.9% of the company's shares. Furthermore, the combined value of these institutional holdings totals $438.88 billion.
On August 14, LLY completed the acquisition of Sigilon Therapeutics, Inc. (SGTX). This acquisition enables LLY to further its research and development efforts in the field of encapsulated cell therapies, including the advancement of SIG-002 for the treatment of type 1 diabetes.
On the same day, LLY acquired Versanis Bio. This acquisition broadens LLY’s product portfolio to incorporate Versanis' primary asset, bimagrumab, currently under evaluation in a Phase 2b study both as a standalone treatment and in combination with semaglutide for adults dealing with overweight or obesity.
Commenting on this, Ruth Gimeno, Ph.D., group vice president of diabetes, obesity, and cardiometabolic research at LLY, said, “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.”
The stock’s trailing-12-month EBITDA margin of 33.08% is 532.9% higher than the 5.23% industry average. Its trailing-12-month levered FCF margin of 17.13% is significantly higher than the 0.22% industry average. Likewise, LLY’s trailing-12-month cash per share of $3 is 139.6% higher than the industry average of $1.25.
For the fiscal second quarter, which ended on June 30, 2023, LLY’s revenue increased 28.1% year-over-year to $8.31 billion, while its operating income rose 74.7% from the year-ago value to $2.13 billion.
The company’s non-GAAP net income and non-GAAP EPS amounted to $1.90 billion and $2.11, representing increases of 68.3% and 68.8% from the prior-year quarter, respectively. Also, its non-GAAP gross margin came in at $6.63 billion, up 28% year-over-year.
Street expects LLY’s revenue and EPS for the third quarter (ending September 2023) to increase 27.1% and 47% year-over-year to $8.82 billion and $2.91, respectively. Moreover, the company topped its EPS and revenue estimates in three of the trailing four quarters, which is promising.
LLY’s shares have gained 77.3% over the past six months and 80.2% over the past year to close the last trading session at $557.11.
LLY’s POWR Ratings reflect this robust outlook. It has an overall rating of B, which translates to 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 Growth and a B for Stability, Sentiment, and Quality. Among the 160 stocks in the Medical – Pharmaceuticals industry, it is ranked #15. To see additional POWR Ratings for Value and Momentum of LLY, click here.
Stock #2: Zoetis Inc. (ZTS)
ZTS discovers, develops, manufactures, and commercializes animal health medicines, vaccines, and diagnostic products in the United States and internationally. It markets its products to veterinarians, livestock producers, and pet owners.
Nearly 91.5% of ZTS ownership is attributed to institutions, indicating that the stock enjoys trust and confidence among institutional investors. The total value of these institutional holdings stands at approximately $81.05 billion.
On September 1, ZTS paid its shareholders a quarterly dividend of $0.38 per share. The company’s annual dividend of $1.50 translates to a 0.78% yield on the prevailing prices, while its four-year average dividend yield is 0.61%.
Its dividend payouts have grown at CAGRs of 23.8% and 24.6% over the past three and five years, respectively. Also, it has a record of four years of consecutive dividend growth.
On March 1, ZTS revealed that it had received a $15.30 million grant from the Bill &Melinda Gates Foundation. This grant will support the further development and integration of innovative solutions aimed at advancing veterinary care and diagnostic services.
Furthermore, this financial support will empower ZTS to broaden the scope of its ongoing African Livestock Productivity and Health Advancement (A.L.P.H.A.) initiative to include aquaculture in addition to cattle, poultry, and swine in an additional seven countries in Sub-Saharan Africa.
ZTS’ trailing-12-month EBIT margin of 36.28% is significantly higher than the 0.15% industry average. Its trailing-12-month cash per share of $3.73 is 197.9% higher than the $1.25 industry average. Furthermore, the stock’s trailing-12-month CAPEX/Sales of 8.68% is 92.3% higher than the 4.52% industry average.
In the fiscal second quarter, which ended on June 30, 2023, ZTS’ revenue increased 6.2% year-over-year to $2.18 billion, while its gross profit grew 10.2% from the year-ago value to $1.57 billion. In addition, the company’s non-GAAP net income and non-GAAP EPS amounted to $652 million and $1.41, up 14.9% and 17.5% from the prior-year quarter, respectively.
The consensus EPS estimate of $1.38 for the third quarter (ending September 2023) represents a 13.8% improvement year-over-year. The consensus revenue estimate of $2.19 billion for the ongoing quarter reflects a 9.3% increase from the same period last year.
Moreover, the company has an impressive earnings surprise history, surpassing the EPS estimates in three of the trailing four quarters.
The stock has gained 31.4% year-to-date to close the last trading session at $192.52
ZTS’ strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to Buy in our proprietary rating system.
It also has a B grade for Growth, Stability, Sentiment, and Quality. Within the same industry, it is ranked #14. Click here to see the other ratings of ZTS for Value and Momentum.
Stock #1: Taro Pharmaceutical Industries Ltd. (TARO)
Based in Haifa, Israel, TARO develops, manufactures, and markets prescription and over-the-counter pharmaceutical products in the United States, Canada, Israel, and internationally. It offers its products for various therapeutic categories comprising allergy, analgesic, antibacterial, anti-inflammatory, anti-cancer, etc.
The collective value of the holdings of institutional holders amounts to $193 million. Moreover, 44 institutions have increased their position in the company, buying 945,381 shares.
TARO’s trailing-12-month EBIT margin of 0.35% is 131.9% higher than the 0.15% industry average. Its trailing-12-month cash per share of $3.30 is 164.1% higher than the $1.25 industry average. Furthermore, the stock’s trailing-12-month levered FCF margin of 13.12% is significantly higher than the 0.22% industry average.
For the first quarter of fiscal 2024, which ended on June 30, 2023, TARO’s net sales increased 1.4% year-over-year to $158.89 billion, while its gross profit stood at $64.08 million.
During the same period, the company’s net income amounted to $10.03 million and $0.27 per share, respectively. Also, its total liabilities came in at $396.52 million, declining 2% compared to $404.66 million as of March 31, 2023.
Analysts expect TARO’s revenue and EPS for the third quarter (ending December 2023) to increase 17.7% and 21.1% year-over-year to $163.79 million and $0.23, respectively.
TARO’s shares have gained 37.5% year-to-date to close the last trading session at $39.92.
It’s no surprise that TARO has an overall rating of B, which translates to Buy in our proprietary rating system. It has an A grade for Value and a B for Stability and Sentiment. Out of 160 stocks in the same industry, it is ranked #12.
In addition to the POWR Ratings we’ve stated above, we also have TARO’s ratings for Growth, Momentum, and Quality. Get all TARO ratings here.
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LLY shares were trading at $557.45 per share on Tuesday afternoon, up $0.34 (+0.06%). Year-to-date, LLY has gained 53.59%, versus a 18.49% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.
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