The pharmaceutical industry is an excellent place to look for companies that can survive difficult economic times, emerging perhaps battered and bruised but in one piece nonetheless. After all, people need medicines in good times and bad. That’s why many of the top players in this sector have been around for decades, surviving several economic and market downturns in the process, and are likely to remain in business for decades to come.
Among the many pharma stocks on the market, two that I think are particularly strong picks right now are Johnson & Johnson (NYSE:JNJ) and Merck (NYSE:MRK). Both companies have felt the effects of the coronavirus pandemic, and their stocks have lagged the broader market in recent months. However, both also have the tools to recover in the long run.
1. Johnson & Johnson
With a market cap of $445.62 billion (as of this writing), Johnson & Johnson is one of the largest healthcare companies in the world. But it would be a mistake to think its growth days are behind it. For one thing, it can continue to sustainably grow revenue and earnings thanks to its deeply diversified operations.
Johnson & Johnson’s largest segment is its pharmaceutical business. It boasts a broad lineup of drugs and vaccines for the treatment or prevention of several forms of cancer, inflammatory diseases, infectious diseases, and more. In the first quarter, the pharmaceutical business reported sales of $12.2 billion, up 9.6% year over year. Several Johnson & Johnson treatments also earned regulatory approvals in Q1.
Thanks to a formidable pipeline with dozens of clinical programs, the drugmaker routinely adds new sources of revenue.
Then there is Johnson & Johnson’s consumer health business, which owns numerous famous over-the-counter (OTC) healthcare brands such as Neutrogena, Aveeno, Tylenol, and more. In the first quarter, its sales in this segment dropped by 2.3% year over year to $3.5 billion.
That decline was because late in Q1 2020, customers loaded up on OTC products ahead of lockdowns as COVID-19 was starting to wreak havoc. That gave sales for the quarter an unusual one-time boost. The comparative drop this year is therefore nothing to worry about.
Finally, there is the medical devices business. Of Johnson & Johnson’s three segments, this was arguably the one most affected by the pandemic. However, things seem to be getting back to normal. In the first quarter, medical devices revenue jumped by 10.9% to $6.6 billion. Johnson & Johnson’s business diversification is a major strength — when sales decline in one segment, the other two can carry it through.
The healthcare giant is also geographically diversified, as it generates roughly half of its revenue outside the U.S. And let’s not forget that Johnson & Johnson is a Dividend King, having raised its dividend payouts annually for more than 50 consecutive years. That makes the stock a steady source of passive income that investors can take to the bank. Putting all of this together, Johnson & Johnson is well-positioned to continue performing strongly in the long run. And after its share-price underperformance over the past year, this may be an excellent entry point for new investors.
Merck continues to suffer from the negative impacts of the pandemic. In the first quarter, its sales of $12.1 billion were more or less flat year over year, while GAAP earnings per share declined by 1% to $1.26.
Merck’s fourth-quarter 2020 financial results were also disappointing, but even so, there are reasons to be optimistic. Most notably, there is the pharma giant’s best-selling drug, Keytruda. It’s approved for the treatment of many different forms of cancer, and the company is still looking to add new indications to its label. Keytruda is on course to become the world’s best-selling prescription drug within the next few years.
According to the research company Grand View Research, Keytruda will take the No. 1 spot by 2026 — with forecast annual sales of almost $25 billion. Keytruda racked up $14.4 billion in sales last year.
Sales in Merck’s animal health business are growing even faster than those in its pharmaceutical segment, up by 17% year over year to $1.4 billion in the first quarter. Long-term trends including population growth and rising demand for protein (which means higher demand for healthcare products for livestock) will power further growth for Merck and its peers in this sector.
Merck also boasts a strong pipeline, including R&D partnerships with other big-name companies. For instance, back in March, the drugmaker announced a collaboration to develop HIV medicines with biotech giant Gilead Sciences.
At least some of Merck’s programs should pan out, providing new revenue sources down the road. Overall, Merck has the tools it will require in order to bounce back from its poor stock market performance over the past year. Investors willing to be patient would do well to add shares of this pharma stock to their portfolios before that recovery happens.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.