The drug and biotech sector has recovered over the past couple of months, following a slow start to the year, primarily due to the better-than-expected fourth-quarter performance of large drugmakers and an overall optimistic outlook for the year. Innovation is at its peak for the industry, with key spaces like rare diseases, next-generation oncology treatments, obesity, immunology and neuroscience attracting investor attention. R&D innovation is likely to remain a major focus area in 2025 . M&A activity is also expected to remain strong, particularly with Trump’s return to the White House.
Regular pipeline setbacks, slow ramp-up of newer drugs, patent cliffs, regulatory risks and broader market concerns related to the economy are some of the headwinds for the sector. There remains uncertainty about how Robert F. Kennedy Jr., the new Health Secretary, will treat the drug and biotech sector as he is known to be a vaccine skeptic.
Nonetheless, large drugmakers have several robust revenue streams and are mostly profitable companies, which make them safe havens for investments. Among the large drugmakers, AbbVie ABBV, Novo Nordisk NVO, Novartis NVS, Pfizer PFE and Bayer BAYRY are worth retaining in one’s portfolio.
Industry Description
The Zacks Large Cap Pharmaceuticalsindustry comprises some of the largest global companies that develop multi-million-dollar drugs for a broad range of therapeutic areas, like neuroscience, cardiovascular and metabolism, rare diseases, immunology and oncology. Some of these companies also make vaccines, animal health products, medical devices and consumer-related healthcare products.They invest millions of dollars in their product pipelines and line extensions of their already-marketed drugs.
Continuous innovation is a defining characteristic of pharma companies, and these large drugmakers are constantly investing in drug development and the discovery of new medicines. Regular mergers and acquisitions and collaboration deals are other key features of large drugmakers
What's Shaping the Future of the Large-Cap Pharma Industry?
Innovation and Pipeline Success: For big drugmakers, an innovative pipeline is a competitive necessity and key to top-line growth. Pharma companies are continually striving to ramp up innovation and allocate a significant portion of their revenues to R&D. Several drugmakers are embracing AI technology to accelerate the drug discovery process for deliveringmore effective therapies. Successful innovation and product line extensions in key therapeutic areas, along with strong clinical study results, may serve as important catalysts for these stocks.
Aggressive M&A & Collaboration Activity: The sector is characterized by aggressive M&A activities. Given that it takes several years and millions ofdollars to develop new therapeutics from scratch, large pharmaceutical companies, sitting on substantial cash reserves, regularly acquire innovative small and mid-cap biotech companies to expand their pipelines.
Also, sloppy sales of mature drugs, dwindling in-house pipelines, government scrutiny of drug prices and the growing use of AI for drug discovery whet the M&A appetite of large drugmakers.Moreover, collaborations and partnerships with smaller companies are in full swing.Fast-growing and lucrative markets such as oncology, rare disease and cell and gene therapy are likely to remain focus areas for M&A activities. Recently, areas such as obesity and inflammatory bowel disease have been attracting buyout interest.
An important M&A deal announced this year was J&J’s offer to buy Intra-Cellular Therapies for approximately $14.6 billion. M&A activity is expected to remain rampant in 2025.
Pipeline Setbacks & Other Headwinds: Thefailure of key pipeline candidates in pivotal studies and regulatory and pipeline delays can be setbacks for large drug companies and significantly hurt their share prices. Other headwinds for the industry include pricing and competitive pressure, generic competition for blockbuster treatments, a slowdown in sales of some of the most high-profile older drugs, Medicare drug price negotiations and increasing FTC scrutiny of M&A deals.
Macroeconomic Uncertainty: Escalating geopolitical tensions in various parts of the world, like the Russia-Ukraine war and increasing tensions between the United States and China and their impact on global economic growth and macroeconomic uncertainty, have increased economic woes.
Zacks Industry Rank Indicates a Bright Outlook
The Zacks Large Cap Pharmaceuticals industryis a 12-stock group within the broader Medicalsector. The group’s Zacks Industry Rankis basically the average of the Zacks Rank of all the member stocks.
The Zacks Large Cap Pharmaceuticals industry currently carries a Zacks Industry Rank #67, which places it in the top 27% of 247 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few large drug stocks that are well-positioned to outperform the market based on a strong earnings outlook, let’s take a look at the industry’s performance and its current valuation.
Industry Versus S&P 500 & Sector
The industry has outpaced the Zacks Medical Sector as well as the S&P 500 year to date.
Stocks in this industry have collectively risen 6.3% so far this year compared with the Zacks Medical Sector’s growth of 4.3%. In contrast, the Zacks S&P 500 composite has declined 4.1%.
YTD Price Performance
Industry's Current Valuation
Based on the forward 12-month price-to-earnings (P/E), a commonly used multiple for valuing large pharma companies, the industry is currently trading at 16.69X compared with the S&P 500’s 20.77X and the Zacks Medical Sector's 20.56X.
Over the last five years, the industry has traded as high as 20.80X, as low as 12.92X and at a median of 15.13X, as the chart below shows.
Forward 12-Month Price-to-Earnings (P/E) Ratio
5 Large Drugmakers to Watch
Novo Nordisk: The company has a strong presence in the Diabetes care market, with one of the broadest diabetes portfolios in the industry. NVO’s success in the past few years is underscored by its semaglutide (GLP-1 agonist) medicines, which are marketed as Ozempic and Rybelsus for type II diabetes and Wegovy for obesity and are seeing great demand trends and driving the top line. Label expansions of its semaglutide medicines in cardiovascular and other indications will likely boost sales.
Novo Nordisk has been addressing the supply constraints of Wegovy by making investments to increase production. Moreover, the FDA removed Wegovy from the shortage list in late February, which means the agency is confident that the company can meet its current and future demand.
Novo Nordisk is making good progress with its pipeline, which includes several other new candidates for type-II diabetes and obesity as well as candidates for treating haemophilia.
NVO has a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here
The Zacks Consensus Estimate for 2025 EPS has risen from $3.84 to $3.93 over the past 30 days. The stock has lost 12.5% so far this year.
Price and Consensus: NVO
Bayer: The company’s key drugs, Nubeqa for cancer and Kerendia for chronic kidney disease associated with type II diabetes, are fueling growth in its Pharmaceuticals division. It is also working to expand the labels of Nubeqa and Kerendia, which, if successful, can further drive growth.
Bayer also plans to launch two new drugs in 2025, which are elinzanetant, a hormone-free treatment for menopause symptoms, and ceramides, a drug for the treatment of a certain form of heart disease. The Consumer Health segment also improved in 2024 due to the launch of new products. However, sales in the Crop Science division declined significantly in the past couple of years due to lower volumes and prices for glyphosate-based products.
This Zacks Rank #2 company’s shares have risen 23.9% so far this year. Estimates for its 2025 earnings per share have increased from $1.14 to $1.20 over the past 30 days.
Price and Consensus: BAYRY
Pfizer: It is one of the largest and most successful drugmakers in the field of oncology. The company’s position in oncology was strengthened with the addition of Seagen in December 2023. After possibly experiencing its worst slowdown in 2023/2024, Pfizer appears to be gradually making a comeback and entering a transition phase. Though COVID revenues are declining, its non-COVID operational revenues improved in 2024, driven by its key in-line products like Vyndaqel, Padcev and Eliquis, new launches and newly acquired products like Nurtec and those from Seagen.
Pfizer faces its share of challenges, the key being declining sales of its COVID-19 products. It also expects a significant impact from the loss of patent exclusivity in the 2026-2030 period, as several of its key products may face patent expirations. The Medicare Part D redesign under the Inflation Reduction Act (IRA) is also expected to negatively impact sales of Pfizer’s higher-priced drugs, such as Vyndaqel, Ibrance, and Xeljanz, in 2025.
However, as COVID-related uncertainties dwindle, its revenue volatility is also declining. The company’s non-COVID drugs and contribution from new and newly acquired products should continue to drive top-line growth in 2025. Also, Pfizer expects cost cuts and internal restructuring to deliver savings of at least $6.0 billion. Continued growth in non-COVID sales and significant cost-reduction measures should drive profit growth.
Pfizer has a Zacks Rank #3 (Hold) at present. The Zacks Consensus Estimate for 2025 EPS has risen from $2.95to $2.97 per share over the past 30 days. The stock has lost 1.7% year to date.
Price and Consensus: PFE
AbbVie: Sales of AbbVie’s blockbuster drug, Humira, are declining due to loss of exclusivity and biosimilar erosion. However, the company has successfully navigated Humira's loss of exclusivity (LOE) by launching two other successful new immunology medicines, Skyrizi and Rinvoq, which are performing extremely well, bolstered by approvals in new indications. This should support top-line growth in the next few years.
Strong sales performance of drugs like Rinvoq, Skyrizi, Venclexta and Vraylar, coupled with significant contributions from newer drugs like Ubrelvy, Elahere, Epkinly and Qulipta, should keep driving the company’s top line in 2025.
However, AbbVie is witnessing declining sales of Juvederm fillers in the United States and China due to challenging market conditions, which might be a headwind in 2025. AbbVie also faces other headwinds, such as Humira biosimilar erosion, increasing competitive pressure on cancer drug Imbruvica and regular pipeline setbacks.
Nonetheless, boosted by its new product launches, AbbVie expects to return to robust mid-single-digit revenue growth in 2025 with a high single-digit CAGR through 2029, as it has no significant LOE event for the rest of this decade. A substantial portion of this growth is expected to be driven by the robust performance of Skyrizi and Rinvoq.
AbbVie has several early/mid-stage pipeline candidates with blockbuster potential. The company anticipates several regulatory submissions, approvals, and key data readouts within the next 12 months. It has been on an acquisition spree in the past couple of years, which is strengthening its pipeline.
AbbVie has a Zacks Rank #3 at present.
The stock has risen 17.7% year to date. The Zacks Consensus Estimate for 2025 earnings has risen from $12.28 to $12.30 per share over the past 30 days.
Price and Consensus: ABBV
Novartis: With the separation of Sandoz, Novartis has become a pure-play pharmaceutical company. Novartis has a strong oncology portfolio. Its new oncology drugs, such as Pluvicto, Scemblix, and Kisqali , put up a stellar performance in 2024. Other drugs, such as Cosentyx, Entresto, and Kesimpta, as well as newer drugs like Leqvio and Fabhlata, are expected to contribute significantly to the top line in the coming years. Backed by strong momentum across all key drugs, the solid top-line performance is expected to continue in 2025.
Novartis is also looking to solidify its presence in the promising gene therapy space. The recent spate of acquisitions and collaborations has strengthened its pipeline.
Novartis has a Zacks Rank #3 at present. The Zacks Consensus Estimate for this Swiss drugmaker’s 2025 EPS has risen from $8.45 to $8.47 over the past 60 days. The stock has risen 14.1% so far this year.
Price and Consensus: NVS
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
