- Some large pharmaceutical companies have been hit by Medicare renegotiations on top drug prices, lawsuits, and more.
- Still, these well-established firms offer investors the proposition of stable business and steady passive income via dividends.
- The potential for upside remains at a firm like Merck, despite centuries of history and a lack of a major blockbuster drug in its portfolio.
The size of the pharmaceutical industry in the U.S. in 2023 was estimated to be nearly $575 billion, with an anticipated compound growth rate of about 5.5% through 2030. This key component of the healthcare sector includes both small biotech firms working to develop specialized treatments and much larger, established companies engaging in a wide array of health-related operations.
There is a great deal of debate as to whether the smaller or the bigger components of the pharmaceutical industry are better equipped to drive innovation in developing new drugs, medical equipment, and similar products. However, the stalwarts of the industry typically have a number of advantages over smaller upstarts, including a history of profitability, the prospect of dividend payments or share repurchases to bolster shareholder value, and superb brand recognition and customer engagement.
Still, big pharmaceutical companies offer investors a variety of benefits and considerations as a potential addition to a portfolio, and investors will want to consider how the major players in this space compare before making trading decisions.
1. Merck - Under-the-Radar Growth Opportunity
With origins dating back over 350 years and a market capitalization of $277 billion, Merck & Company (NYSE:MRK) is one of the oldest and best-established pharmaceutical companies in the world. Shares of the firm have had a generally disappointing year, returning just 5.7% in the last 12 months and falling far short of the broader market's gains during that time while the company doesn't have any new blockbuster drugs on the market.
However, even without new star therapeutics in its production line, Merck has had significant bottom-line growth thanks to solid performance across many of its divisions, resulting in earnings per share of $2.28 in the latest quarter, solidly above analyst predictions. With a forward P/E ratio of under 14, Merck is undervalued relative to some of its large pharmaceutical peers. Analysts continue to view Merck as having strong upside potential, seeing a consensus price target of $133, more than 20% above current levels.
2. Johnson & Johnson - Solid Dividend Play Despite Challenges
Pharmaceutical giant Johnson & Johnson (NYSE:JNJ) has had a rough year. It has faced a prolonged legal battle over allegations that its talc products caused cancer, which has led to a settlement of more than $9 billion to be paid out over a period of 25 years. Medicare's price renegotiations via the Inflation Reduction Act have worked out unfavorably for the drugmaker in some cases as well, hurting its ability to generate revenue in this area. Overall, JNJ shares have returned just 2.8% in the last year.
Nonetheless, the company increased its sales guidance in the latest quarter on the strength of leading drugs, including Darzalex, and analysts do anticipate growth in earnings, although modest. Investors can also count on Johnson & Johnson to continue to provide a healthy dividend payout annualized at $4.96 per share, with a sustainable payout ratio of under 31%. As a major pharmaceutical player, Johnson & Johnson benefits from a massive R&D operation with dozens of potential new drugs—and possible new revenue sources—in the pipeline.
3. AbbVie - Major Dividend Gains, Top-Line Potential
AbbVie (NYSE:ABBV) has existed as an independent company for just over a decade. During that time, the maker of the massively popular immunosuppressive drug Humira has nearly quadrupled its dividend payments.
It also maintains a competitive forward dividend yield above 3%.
Despite the fact that patent exclusivity on Humira lapsed several quarters ago, AbbVie's growing portfolio of drugs across various areas of medicine and its substantial pipeline has continued to foster top-line gains.
Analysts expect it to continue by posting nearly 12% earnings growth.
Pharmaceutical Giants Provide Stability If Not Blockbuster Potential
It's easy to see the appeal of a small biotech firm that strikes gold with a blockbuster drug and sees a massive surge in sales and stock price. However, many smaller pharmaceutical companies struggle to generate revenue and maintain profitability, making them a risky proposition for investors. Large pharmaceutical firms may be less likely to skyrocket in this way, but their breadth of offerings often leads to greater stability and, importantly, a chance at steady passive income.