Generally, companies in the healthcare sector show resilience amid challenging macro conditions. However, certain healthcare stocks have been under pressure during the pandemic due to supply chain disruptions, lower demand for certain drugs and a drop in the demand for medical devices as elective procedures have largely been halted. While the focus remains on those developing a COVID-19 vaccine or treatment, there are companies that have strong product pipelines comprised of treatments in key therapeutic areas, thus, offering attractive investment opportunities.
We will discuss the recent performance of healthcare giants Johnson & Johnson and Eli Lilly, and use the TipRanks Stock Comparison tool to choose the stock that reflects a more compelling play.
Johnson & Johnson (JNJ)
Johnson & Johnson is one of the leading contenders in the race to develop a COVID-19 vaccine. The company faced a temporary setback when it had to pause its late-stage Janssen COVID-19 vaccine trial due to an unexplained illness experienced by one participant. However, on Oct. 23, the company said that it is preparing to resume recruitment for the Phase 3 ENSEMBLE trial of its COVID-19 vaccine in the US. It also added that an evaluation determined that the serious medical event was not caused by the company’s vaccine candidate.
Meanwhile, Johnson & Johnson’s 3Q sales grew 1.7% year-over-year to $21.1 billion, reflecting a recovery compared to the 10.8% decline in 2Q. The 3Q sales growth was driven by continued strength in the company’s Pharmaceutical division (largest segment by sales), which posted revenue growth of 5%. Meanwhile, sales for the Consumer Health division rose 1.3%.
The Medical Devices division recovered to quite an extent in 3Q compared to the previous quarter, but sales were still down 3.6% year-over-year due to the continued deferral of medical procedures amid rising COVID-19 cases. Overall, adjusted EPS grew 3.8% to $2.20. On the back of this performance, the company raised its full-year outlook, and now expects 2020 sales growth to be between -1.0% to 0.0% and adjusted EPS to decline by 7.3%-8.4%.
Johnson & Johnson’s strengths include its diversified business model and a strong pipeline, which includes over 30 Phase 3 programs. JNJ is a Dividend King and has hiked its dividend for 58 consecutive years, including an increase of 6.3% this year. However, the company faces risks in the form of multiple court cases (including those related to its baby talc and opioid crisis-related litigation), with its blockbuster immunology drug Remicade, cancer drug Zytiga, multiple myeloma drug Velcade and bone marrow stimulating drug Procrit facing competition from generic drugs and biosimilars.
However, the strength in immunology drugs Stelara and Tremfya and cancer drugs Darzalex and Imbruvica is helping in mitigating the pressure related to generics. (See JNJ stock analysis on TipRanks)
Based on the 3Q results and positive trends across the company’s diversified business model, Cantor Fitzgerald analyst Louise Chen increased the price target on Johnson & Johnson to $180 from $168 and reiterated a Buy rating. Chen said that although the temporary pause in the company’s COVID-19 vaccine program created some noise, it does not change her investment thesis for JNJ.
Overall, JNJ scores a Strong Buy analyst consensus based on 5 unanimous Buys. With shares down 1.3% so far in 2020, the average price target of $172.50 indicates an upside potential of about 20% in the months ahead.
Eli Lilly and Company (LLY)
Eli Lilly is developing two neutralizing antibodies for the treatment of COVID-19: LY-CoV555 (bamlanivimab) and LY-CoV016 (etesevimab). Earlier this month, the U.S. Food and Drug Administration (FDA) granted emergency use authorization for bamlanivimab for the treatment of mild to moderate COVID-19 in adults and pediatric patients 12 years and older, who are at high risk of progressing to severe COVID-19 and/or hospitalization.
Also, on Nov. 20, Canada granted interim authorization for bamlanivimab as a COVID-19 treatment for use in patients who are not hospitalized but are at risk of serious illness. Additionally, Eli Lilly and Incyte recently announced that the FDA approved the emergency use of the arthritis drug baricitinib (Olumiant), in combination with Gilead Sciences’ remdesivir, for treating COVID-19 patients.
Coming to the recent financial results, Eli Lilly’s 3Q performance fell short of analysts’ expectations due to the impact of the COVID-19 research and development expenses and lower demand for some of the drugs. Adjusted EPS grew 4% year-over-year to $1.54. Revenue increased 5% year-over-year to $5.74 billion, driven by growth in Taltz, Trulicity, Verzenio, Jardiance, Olumiant, Emgality, Tyvyt, Baqsimi, Cyramza, Retevmo and Basaglar, although partially offset by lower prices.
Looking ahead, the company expects its 2020 adjusted EPS to be between $7.20-$7.40, compared to $6.04 in 2019, and revenue of $23.7-$24.2 billion, compared to $22.3 billion in 2019. However, the company cautioned that delivering the higher end of the range would likely require the inclusion of moderate revenue from potential COVID-19 treatments, which is uncertain.
Eli Lilly is one of the leading players in the diabetes space, with drugs like Trulicity, Humalog, Humulin and Basaglar. Its best-selling drug, Trulicity, generated revenue of $3.57 billion in the first nine months of 2020, reflecting 22% year-over-year growth. The company is also focusing on its oncology portfolio (Verzenio, Alimta and Tyvyt) and immunology drugs (Taltz and Olumiant). Meanwhile, Eli Lilly’s strong product pipeline boasts 19 indications in Phase 3, including Tirzepatide for Type 2 diabetes.
In reaction to the recent 3Q results, Mizuho Securities analyst Vamil Divan lowered his price target for Eli Lilly to $156 from $164 and reiterated a Hold rating, saying “We add near-term bamlanivimab (COVID-19 antibody) revenues, but lower Trulicity estimates given increasing pricing pressure that product is facing.”
“We expect that data to justify current estimates, but struggle to see how it delivers significant upside, while worrying about significant possible downside if the data disappoints. FY21 guidance (to be released on Dec 15) and Phase 2 donanemab Alzheimer’s data (expected early 2021) are other important upcoming catalysts,” added Divan. (See LLY stock analysis on TipRanks)
The Street is cautiously optimistic about Eli Lilly, with a Moderate Buy analyst consensus based on 7 Buys and 3 Holds. The average price target stands at $173, implying an upside potential of 20.7% from current levels. Shares have risen 9.2% year-to-date.
Johnson & Johnson’s diversified business model and greater upside potential compared to Eli Lilly make it a better healthcare pick. Moreover, its dividend yield of 2.76% is higher, with Eli Lilly’s yield coming in at 2.04%.
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment