For years, the healthcare industry has been a cornerstone of the economy, offering resilience in both stable and uncertain times. A report from McKinsey & Company predicts that the sector will continue to thrive, with growth expected to reach 7% between 2022 and 2027. Unlike many industries, healthcare tends to remain steady even when consumers tighten their belts, as demand for its products and services rarely wanes. This makes healthcare a reliable player with typically stable earnings, regardless of broader economic shifts.
Healthcare stocks, particularly large-cap pharma companies, have plenty to offer: they bring essential services, have the largest possible customer base, and have ready support from both demographic trends and government social policies.
In a recent note on large-cap pharma stocks, J.P. Morgan analyst Chris Schott stated, “As we think about the [US biopharma] group more broadly, we would highlight improving sentiment which we see as stemming from 1) macro dynamics (i.e. worries about a potential recession / shift to value / shift to more defensive names) and 2) IRA price negotiations implying more modest headwinds than feared for the sector going forward. At the same time, valuation for the group broadly remains near all-time lows compared to the S&P500 and we see continued oppty for the sector to move higher from here. Net-net, we continue to see an attractive risk/reward for a number of names in the group…”
Which names exactly? Schott has singled out Eli Lilly (NYSE:LLY) and AbbVie (NYSE:ABBV), two major players in the pharma world, as key stocks investors should be watching. Let’s dive into why these companies are making waves in the healthcare sector.
Eli Lilly & Company
The first company we’ll look at, Eli Lilly, dates back to 1876, when its namesake founder – a war hero from the Civil War, a pharmacist by trade, and a businessman by avocation – started his most successful venture. Today, Lilly’s company is the world’s largest pharmaceutical firm, with a market cap exceeding $830 billion and a stock price that has gained more than 60% in the past 12 months, more than double the gain on the S&P 500 index over the same period. Lilly is known for its wide-ranging portfolio of approved medicines, as well as its extensive development pipeline.
Among the former category, Lilly has staked a niche for itself as a go-to company for medications to treat both type-2 diabetes and obesity, two conditions that are frequently related to adult onset. The company has several drugs on the market in these categories, including Mounjaro, Verzenio, and Zepbound, and all three are noted by the firm as strong revenue drivers. In the company’s last financial report, covering 2Q24, Lilly reported more than $1 billion in sales revenue from each of these drugs (Mounjaro, $3.09 billion; Verzenio, $1.33 billion; and Zepbound, $1.24 billion). Together, these three drugs made up approximately 50% of the company’s total revenue.
Mounjaro, particularly, deserves a closer look. The drug, a treatment for type-2 diabetes, was approved by the FDA in May of 2022 and sales have shown rapid growth. Zepbound, more recently approved, targets a related niche; it is a weight-loss drug frequently prescribed for adults with diabetes. Verzenio, a kinase inhibitor used in the treatment of breast cancer, is another of Lilly’s fast-growing sellers, with sales up 44% year over year.
In the company’s pipeline, orforglipron stands out for notice. This drug candidate is undergoing Phase 3 testing as a treatment for both obesity and diabetes, and the company expects to release data from the studies during the first half of next year.
All of this provides a solid underpinning for the Eli Lilly company, and gives the firm a sound position in the biopharmaceutical sector. The company generated $11.3 billion in total revenues during Q2 of this year, up an impressive 36% year-over-year and beating the forecast by $1.33 billion. At the bottom line, the company’s $3.92 non-GAAP earnings-per-share figure was $1.16 better than had been expected. As noted, the company’s three best-selling drugs in the quarter made up half the revenue total, showing how even a biopharma giant can benefit from releasing a blockbuster drug.
For JPM’s Schott, the key points to remember here are the company’s upcoming catalysts – he notes orforglipron, part of the firm’s incretin weight loss portfolio – as well as the stock’s relative valuation.
“While LLY continues to trade at a sector high valuation of ~37.5x 2025e EPS (reflecting the company’s best-in-class growth profile), we continue to see further upside to Street sales estimates for the company’s incretin portfolio from here (in particular we see Ph3 data for orforglipron driving upside to longer-term consensus estimates). In addition, with this topline upside increasingly falling to the bottom line (as reflected in the company’s 2Q guidance raise), we see the potential for substantial EPS upside for LLY relative to current Street estimates over time and believe this dynamic should support further upside to shares,” Schott stated.
Looking at that upside, Schott rates LLY as Overweight (i.e. Buy), with a $1,100 price target to suggest a one-year upside of 19%. (To watch Schott’s track record, click here)
Overall, the Street’s consensus rating here is a Strong Buy, based on 20 reviews that include 18 Buys and 2 Holds. The stock is selling for $923.71 and its $1,039.88 average target price implies an increase of 12.5% in the next 12 months. (See LLY stock forecast)
AbbVie
Next under the JPM microscope is AbbVie, another of the pharma world’s major players – the company’s $343 billion market cap is the fourth-largest among its peers. The company was founded in 2012 as a research-based pharmaceutical development and manufacturing company, spun off from the parent firm, Abbott Labs. AbbVie is based in Chicago and has a wide-ranging portfolio of drugs approved for use or in the pipeline. Chief among these is Humira, a biologic drug used in the treatment of autoimmune conditions such as Crohn’s disease and rheumatoid arthritis. In 2023, Humira generated $14 billion in revenues, or 27% of AbbVie’s total top line for the year.
While Humira is AbbVie’s headliner, the company has not rested on that laurel. AbbVie recently put two additional drugs on the market to treat autoimmune diseases, and both are showing marked success. Skyrizi, first approved in 2019 to treat plaque psoriasis and in June of this year to treat ulcerative colitis, generated $7.8 billion in revenue last year, while Rinvoq, an arthritis treatment, brought in $4 billion, making both drugs important contributors to the company’s autoimmune portfolio.
AbbVie also has drugs on the market to combat various cancers, including leukemia and lymphoma, as well as Hep C, ophthalmic diseases, and cystic fibrosis. In all, the company’s pharmaceutical products are used to treat more than 75 conditions.
The company’s pipeline is also notable, with more than 90 new drug candidates under investigation or development. Of particular note among these is emraclidine, which AbbVie acquired through its $8.7 billion acquisition of Cerevel Therapeutics earlier this summer. The Cerevel transaction was a direct move by AbbVie to expand its development pipeline, and emraclidine is one of the first fruits of that. The drug candidate is an antipsychotic under development as a treatment for schizophrenia as well as Alzheimer’s-related psychosis. The company expects to release registrational data on the drug before the end of this year, which will be an important catalyst.
On the financial side, AbbVie brought in $14.46 billion at the top line during 2Q24, a total that was up 4.3% from the same quarter in 2023 and came in $430 million better than had been anticipated. The company’s bottom line, reported as a non-GAAP EPS of $2.65, was just shy of the forecast, however, missing by a penny.
Despite the earnings miss in the last quarter, JPMorgan continues to take a bullish stance on AbbVie. Analyst Schott says of the company, “We continue to see ABBV as one of the best-positioned names in our large-cap coverage with a core business that is trending ahead of expectations and Humira becoming less relevant to the story over time (we estimate 2025+ US Humira sales represent <$10 of NPV for ABBV). And with the company set up for HSD top-line / LSD bottom-line growth through the end of the decade, we see the company’s current valuation (16x 2025e EPS) as still reasonable and see the potential for further upside to shares with emraclidine (CERE acquisition) registrational data later this year.”
These comments support the Overweight (i.e. Buy) rating on the shares, while the price target of $210 implies a gain of 8% on the one-year horizon.
Overall, AbbVie has a Moderate Buy consensus rating from the Street’s analysts, based on 15 reviews that break down to 10 Buys and 5 Holds. The shares are currently trading for $194.21 and have an average target price of $199.57, indicating potential for a modest 3% upside in the coming year. (See ABBV stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
