Driven by increasing healthcare spending worldwide amid a rapidly aging population and rising prevalence of chronic illness, growing disposable incomes, and rapid technological advancements, the pharmaceutical industry is poised for steady growth.
Given the industry’s tailwinds, investors could consider buying fundamentally solid pharma stocks Taro Pharmaceutical Industries Ltd. (TARO), AstraZeneca PLC (AZN), and Merck & Co., Inc. (MRK) for long-term growth. These stocks are rated A (Strong Buy) in our POWR Ratings system.
According to a report by the IQVIA Institute, global medicines use increased by 14% over the past five years and is further expected to grow 12% through 2028, bringing the annual usage to 3.8 trillion defined daily doses. Also, global spending on medicine is forecasted to increase by 38% through 2028.
As per Statista, pharmaceuticals market revenue is estimated to reach $1.16 billion in 2024. Revenue in this market is anticipated to grow at a CAGR of 6.2% from 2024 to 2028, resulting in a volume of $1.47 billion by 2028. Small molecule drugs, increasing adoption of biologics, demand for personalized medicine, and rising R&D costs will foster market demand.
Furthermore, Generative AI is transforming several aspects of the pharmaceutical industry, leading to accelerated drug discovery, more efficient clinical trials, and quicker regulatory approvals. As per McKinsey Global Institute, the technology can generate $60 billion to $110 billion a year in economic value for the pharma and medical-product industries.
The global pharmaceutical industry experienced a 5% surge in the number of artificial intelligence-related patent applications in the first quarter of 2024 compared to the previous quarter. The largest share of AI-related patent filings in the pharma industry in the quarter was in the U.S. with 36%.
Moreover, investors’ interest in pharma stocks is evident from the VanEck Vectors Pharmaceutical ETF’s (PPH) 16% returns over the past six months.
Given these favorable trends, let’s look at the fundamentals of the top three Medical - Pharmaceuticals stocks, beginning with the third choice.
Stock #3: Taro Pharmaceutical Industries Ltd. (TARO)
Headquartered in Haifa, Israel, TARO is a science-based pharmaceutical company that develops, manufactures, and markets prescription and over-the-counter pharmaceutical products internationally. It also develops and manufactures active pharmaceutical ingredients primarily for use in its finished dosage-form products.
In terms of forward EV/Sales, TARO is trading at 0.47x, 85.7% lower than the industry average of 3.29x. Likewise, the stock’s forward Price/Sales multiple of 2.58 is 25.7% lower than the industry average of 3.48.
TARO’s trailing-12-month EBIT margin and levered FCF margin of 5.76% and 13.26% are significantly higher than the industry averages of 0.65% and 0.79%, respectively. Further, the stock’s trailing-12-month CAPEX/Sales of 8.94% is 125.7% higher than the industry average of 3.96%.
During the fiscal 2024 third quarter that ended December 31, 2023, TARO’s sales increased 12.9% year-over-year to $157.14 million. Its gross profit grew 24.7% from the year-ago value to $79.88 million. The company’s operating income of $15.88 million indicates a growth of 1,141.8% year-over-year.
Also, the company’s net income came in at $20.21 million and $0.54 per ordinary share, up 178.1% and 184.2% from the prior year’s quarter, respectively. Its cash and cash equivalents were $382.41 million as of December 31, 2023, compared to $154.49 million as of March 31, 2023.
Analysts expect TARO’s revenue for the fourth quarter (ended March 2024) to increase 6.5% year-over-year to $156.06 million, and its EPS is expected to grow 72.2% year-over-year to $0.31. For the fiscal year 2024, the company’s revenue and EPS are expected to increase 7.9% and 61.8% year-over-year to $618.07 million and $1.10, respectively.
TARO’s stock has surged 20.4% over the past six months and 66.9% over the past year to close the last trading session at $42.39.
TARO’s robust outlook is reflected in its POWR Ratings. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
The stock has an A grade for Value and a B for Growth, Stability, and Sentiment. TARO is ranked #4 out of 161 stocks in the Medical - Pharmaceuticals industry.
Click here to access additional TARO ratings for Quality and Momentum.
Stock #2: AstraZeneca PLC (AZN)
Based in Cambridge, United Kingdom, AZN is a biopharmaceutical company that focuses on the discovery, development, manufacture, and commercialization of prescription medicines. The company's marketed products include Tagrisso, Imfinzi, Lynparza, Calquence, Enhertu, and Orpathys.
AZN’s revenue and EBITDA have grown at respective CAGRs of 20% and 33.4% over the past three years. The company’s EBIT has increased 40.7% over the same timeframe, while its net income and EPS have improved at CAGRs of 16.8% and 10.1%, respectively.
On May 2, AZN announced positive high-level results from an interim analysis of the ECHO Phase III trial. The trial of Calquence, in combination with standard-of-care chemoimmunotherapy, bendamustine, and rituximab, demonstrated a statistically significant and clinically meaningful improvement in progression-free survival and could provide a new standard of care for patients.
On April 29, AZN announced positive high-level results from the DESTINY-Breast06 Phase III trial, which showed that ENHERTU® demonstrated a statistically significant and clinically meaningful improvement in progression-free survival in patients with HR-positive, HER2-low metastatic breast cancer following one or more lines of endocrine therapy.
The DESTINY-Breast06 shows that ENHERTU could become a new standard of care for patients with HER2-low and HER2-ultralow metastatic breast cancer.
For the first quarter that ended March 31, 2024, AZN’s total revenue increased 16.5% year-over-year to $12.68 billion. Its gross profit rose 16.6% from the year-ago value to $10.46 billion. The company’s operating profit of $3.11 billion indicates growth of 22.2% from the prior year’s quarter.
Furthermore, the company’s profit after tax and EPS came in at $2.18 billion and $1.41, up 20.8% and 21.5% year-over-year, respectively. Its EBITDA increased 7.9% from the year-ago value to $4.37 billion.
Street expects AZN’s revenue for the third quarter (ending September 2024) to increase 12.8% year-over-year to $12.97 billion. Its EPS is expected to grow 14.1% year-over-year to $0.99 for the same period. Also, the company topped the consensus EPS and revenue estimates in three of the trailing four quarters.
Shares of AZN have surged 13.7% over the past month and 19.8% over the past six months to close the last trading session at $76.41.
AZN’s POWR Ratings reflect its promising prospects. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
The stock has an A grade for Growth and Sentiment. It also has a B grade for Stability and Quality. AZN is ranked #3 of 161 stocks within the Medical - Pharmaceutical industry.
To see additional POWR Ratings of AZN for Value and Momentum, click here.
Stock #1: Merck & Co., Inc. (MRK)
MRK is a global healthcare company. It operates in the Pharmaceutical and Animal Health segments. Its Pharmaceutical segment offers human health pharmaceutical products and the Animal Health segment discovers, develops, manufactures, and markets veterinary pharmaceuticals. It caters to drug wholesalers and retailers, hospitals, and government agencies.
MRK’s revenue has grown at a CAGR of 13.6% over the past three years. The company’s total assets have improved at a CAGR of 5.21% over the same timeframe.
On May 1, MRK announced that the Phase 3 KEYNOTE-811 trial evaluating KEYTRUDA® (pembrolizumab), MRK’s anti-PD-1 therapy, met its endpoint of overall survival for the first-line treatment of patients with human epidermal growth factor receptor 2 (HER2)-positive locally advanced unresectable or metastatic gastric or gastroesophageal junction (GEJ) adenocarcinoma.
KEYTRUDA is approved in combination with trastuzumab and fluoropyrimidine- and platinum-containing chemotherapy by the FDA under accelerated approval regulations, under which it demonstrated a statistically significant and clinically meaningful improvement in OS.
On April 29, MRK announced positive data for V116, an investigational, 21-valent pneumococcal conjugate vaccine designed for adults. The STRIDE-10, a Phase 3 trial evaluating V116, evaluated the immunogenicity, tolerability, and safety of V116 compared to PPSV23.
The positive results demonstrated the potential of V116 to help prevent invasive pneumococcal disease among adult populations.
For the first quarter that ended March 31, 2024, MRK’s sales increased 8.9% year-over-year to $15.77 billion, of which its sales from KEYTRUDA rose 19.9% year-over-year to $6.95 billion. The company’s income before taxes grew 55.3% from the year-ago value to $5.67 billion.
In addition, non-GAAP net income attributable to MRK and non-GAAP EPS of $5.28 billion and $2.07 indicate growth of 48.1% and 47.8% year-over-year, respectively.
As per its updated full-year 2024 outlook, the company raised its sales outlook from the range of $62.7 to $64.2 billion to between $63.10 and $64.30 billion. Its non-GAAP EPS is expected to be $8.53 to $8.65, which was previously between $8.44 and $8.59.
Analysts expect MRK’s revenue and EPS for the third quarter (ending September 2024) to increase 4.4% and 8.7% year-over-year to $16.67 billion and $2.32, respectively. Moreover, the company topped the consensus revenue and EPS estimates in each of the trailing four quarters, which is remarkable.
MRK’s stock has climbed 25.2% over the past six months and 10.7% over the past year to close the last trading session at $128.80.
MRK’s sound fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
MRK has an A grade for Growth and Sentiment. The stock also has a B grade for Quality and Stability. MRK is ranked first among 161 stocks in the same industry.
To access additional ratings of MRK for Value and Momentum, click here.
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MRK shares rose $0.20 (+0.16%) in premarket trading Thursday. Year-to-date, MRK has gained 19.08%, versus a 6.40% rise in the benchmark S&P 500 index during the same period.
About the Author: Rjkumari Saxena
Rajkumari started her career as a writer but gradually shifted her focus to financial journalism, leveraging her educational background in Commerce. Fascinated by the interplay of business and economic shifts in equities, she aspires to evolve as an analyst. With a knack for simplifying complex financial concepts, her mission is to empower investors with insights that lead to profitable decisions.
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