Biotech
Top 5 Blue Chip Pharmaceutical Companies (May 2024)
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Big Pharma Is Still Alive
The last few years have seen the healthcare sector change radically thanks to biotech innovation. The most visible part was mRNA vaccines, but the arrival of gene therapies, cheap genome sequencing, or stem cell therapies are all there to usher in a new era of medical marvels (you can follow the links for deeper coverage of these topics).
Most of these innovations have been done by smaller companies, and R&D efforts by the biggest pharmaceutical companies have often been not very successful.
Nevertheless, the pharmaceutical industry is still dominated by a few giant corporations. Such blue-chip multi-billion dollar companies are not only the historically dominant players but might as well stay on top for the foreseeable future.
Why is that? How is it that even radical innovation might not threaten incumbent companies?
The Big Pharma Business Model
To understand how “Big Pharma” can stay on top, we can look at the example of the mRNA vaccines.
The innovation itself was very much invented by BioNTech, which took an actually quite old scientific concept and turned it into an entire technology platform.
When the pandemic arrived, it was the perfect time for such a “programmable” vaccine to shine. And it did. But BioNTech did not commercialize it themselves. They partnered with Pfizer to handle approval, production, and commercialization quickly. After all, rival Moderna and countless other companies were pushing for their own COVID-19 vaccine, so time was of the essence.
Simply put, Pfizer brought to BioNTech needed resources in manufacturing, funding, distribution, sales network, clinical trials, handling of regulators, etc…
Innovation vs Acquisitions
Another way for Big Pharma to stay relevant is simply to buy out successful biotech companies.
Biotechnology is a field littered with failed projects and companies. So when one turns out successful, both founder and investors might want to cash out after 10-15 years of patience, hard work, and a bit of luck.
And who could be more qualified than Big Pharma firms, able also to take the innovative drugs and bring them forth to their network of tens of thousands of doctors at once?
They also have the needed financial firepower. For example, with $512B of market capitalization, Johnson & Johnson, the largest pharmaceutical company in 2021 by revenues, registered a net income of almost $18B and a free cash flow of $17B.
Many biotech firms, astonishingly from a scientific and innovation point of view, often trade below a billion dollars. So, if you look at the yearly free cash flow of the 10 largest pharmaceutical companies, this is a lot of dry powder for acquisitions.
Top 5 Blue Chip Pharmaceutical Companies
To qualify as a “blue chip,” we consider only the top 20 companies according to their 2021 revenues.
The term “top” is rather subjective, as is here a mix of existing drug portfolio, historical performance, R&D pipeline, and financial position. We will highlight some of the central parts of the business and incoming important innovations instead of going deep into the entire therapeutics portfolio or the company's financial results.
1. Johnson & Johnson (JNJ)
The largest pharmaceutical company by revenues in 2022, with $94B. The company operates as a conglomerate of 3 sub-businesses: pharmaceuticals, medical devices, and consumer healthcare (by importance order).
Source: J&J
It operates no less than 29 products or platforms with more than $ 1B in annual sales. Non-medical professionals might be more familiar with some of the consumer health products like Listerine, Neutrogena, or Tylenol. Still, more than half of its revenues are from pharmaceuticals, with a focus on 6 therapeutic areas:
- Immunology
- Infectious diseases.
- Neurosciences.
- Oncology.
- Cardiovascular & metabolism.
- Pulmonary hypertension.
The company has grown sales by 6% yearly in the last 20 years, with a 13.2% return to shareholders in the last 10 years. The stock is also one of the rare “dividend aristocrats,” having rising dividends every year for 60 consecutive years.
Overall, Johnson & Johnson is a very safe bet on the pharmaceutical industry, focusing on long-term holdings and the stock price compounding while also giving a moderate but stable and growing dividend.
2. Novo Nordisk (NVO)
The Danish company is highly focused on diabetes & metabolic diseases like obesity, together making 88% of the company's revenues.
Source: Novo Nordisk
The focus on obesity is rather recent, with significant growth in this segment in 2022
The company is also working on an expanding rare disease portfolio and chronic diseases like kidney or liver pathologies.
The company is well-placed to benefit from the worldwide rise of chronic metabolic diseases. This should provide very safe revenue streams and continuous growth in the short term.
A key vulnerability for Novo Nordisk in the long term is the possibility of permanently curing diabetes through stem cells, gene editing, or another new therapeutic method. This is something we have discussed previously when covering Vertex and CRISPR Therapeutics. This is more likely to happen soon for type-1 diabetes, with type-2, the most common, much more likely to be still treated by reducing symptoms for a longer period of time.
So Novo Nordisk provides a safe place for conservative investors, but they will want to monitor tightly the development of the diabetes market and the arrival of potential competitors. The entry of Novo Nordisk into new segments like chronic diseases and obesity might be the right option to sustain the company in the long run.
3. Merck (MRK)
Merck has changed since its 2021 spin-off of women's health and biosimilar products in Organon.
So far, some of the consequently lost revenues have been compensated by the pandemic-boosted sales of the antiviral Molnupiravir.
The company is mostly active in infectious diseases, vaccines, oncology, and cardiovascular & metabolic disorders.
The new start product of Merck is Keytruda, a cancer drug (monoclonal antibody), with sales growing 16%-27% over the last 3 years. It is already approved for multiple cancers and has 13 new applications under review in phase 3 of clinical trials.
The company's revenues and earnings have grown significantly in the last 3 years, especially in 2022.
Source: Merck
This financial success should persist until 2028, when Keytruda loses its patent protection. So, investors in Merck will want to keep an eye on the R&D portfolio to see if the company can reinvent itself after that date.
4. Pfizer
Already a large company, Pfizer made it big with the Covid-19 vaccine. It generated no less than $37B in 2021, for example, almost half of the company's revenues. The pandemic also boosted the sale of the antiviral pill Paxlovid by another $20B.
But Pfizer is not just mRNA vaccines, with a total of 10 products with more than $1B of sales per year.
The company is targeting new product launches: 4 in 2023 and up to 12 by 2024.
Its' management is keen to insist that the growth story is not Covid-dependent, with plans to bring non-Covid sales from the current average of $50B to $84B by 2030.
Source: Pfizer
They also insist that the windfall profits from the pandemic will “allow us to pursue new business development opportunities going forward that could add at least $25 billion of risk-adjusted revenue to our 2030 top-line expectation”
5. Bayer
Bayer is equal parts an agriculture company and a pharmaceutical company.
After its merger with Monsanto, it is one of the world's largest biotech and seed companies. It controls most of the traditional GMO seed market and is also working on using CRISPR for the next generation of seeds for corn, soybean, wheat, etc…
The pharmaceutical activity, under prescription and over-the-counter (OTC), is roughly half of the company’s revenues, with the other half made of the agricultural business. It covers a large spectrum of therapeutic areas, with a third of its sales in the cardiovascular segment.
Source: Bayer Presentation
Bayer’s focus on innovation is on
- Eye treatments, in partnership with Regeneron (Eylea is the second best-selling drug of Bayer)
- Stem cell treatments for Parkinson’s disease and heart attacks, in partnership with BlueRock Therapeutics.
- Gene therapies, in partnership with AskBio.
- Oncology (cancer treatments): 2 drugs in clinical trials in phase III, 2 in phase II, and 8 in phase I
Bayer's valuation has been hammered down due to legal risk from its Monsanto acquisition and court case on the potential of RounUp to cause cancer.
Since then, the company's valuation has fallen to less than what it paid for acquiring Monsanto. This has been a distraction from its solid performance in the seeds, other pesticides, and healthcare segments.
Any investor in this company will want to judge by themselves if it is indeed one of the most undervalued biotech companies, if the litigation risk is too high, and if management's past mistakes can be forgiven.
