Novartis AG (NVS) and Abbott Laboratories (ABT) are two established companies in the healthcare space. NVS develops, manufactures, and markets branded and generic prescription drugs, active pharmaceutical ingredients (APIs), biosimilar and ophthalmic products. ABT is engaged in the discovery, development, manufacture, and sale of a diversified line of health care products.
While companies that have developed COVID-19 therapies or vaccines have stolen all the headlines of late and have seen their stocks gain in-part because of it, NVS and ABT have also capitalized on the increasing need for advanced healthcare services, though perhaps with less fanfare.
While NVS has returned 9.8% over the past five years, ABT has gained 154.2%. In terms of their past-year performance, ABT is a clear winner with 27% returns versus NVS’ negative values. But which of these two stocks is a better pick now? Let’s find out.
NVS entered an agreement on December 17 to acquire Cadent Therapeutics, a Cambridge, Massachusetts based neuroscience company. The agreement includes two clinical stage molecules for schizophrenia and movement disorders and MIJ821, a clinical stage molecule for addressing treatment-resistant depression. The company announced positive findings from the first interpretable results of the Phase III KESTREL study on December 15, which assessed the efficacy and safety of Beovu (brolucizumab) 3 mg and 6 mg in diabetic macular edema (DME).
On December 16, the company announced that the U.S. Food and Drug Administration (FDA) had granted iptacopan (LNP023) Breakthrough Therapy Designation (BTD) in paroxysmal nocturnal hemoglobinuria (PNH) and Rare Pediatric Disease (RPD) Designation in C3 glomerulopathy (C3G). NVS also announced on December that the European Commission (EC) had approved Leqvio (inclisiran) for the treatment of adults with hypercholesterolemia or mixed dyslipidemia.
In December, ABT announced FDA had approved the updated labeling for the company’s HeartMate 3 heart pump to be used in pediatric patients with advanced refractory left ventricular heart failure. The company also announced that the FDA has issued an Emergency Use Authorization (EUA) for virtually guided at-home use of its BinaxNOW COVID-19 Ag Card rapid test for detection of COVID-19 infection.
ABT announced in December that it had received the CE Mark for its new quantitative SARS-CoV-2 IgG (Immunoglobulin G) lab-based serology test, and the global release of its first virtual reality-based training program., which is designed to change how interventional cardiologists are trained to use optical coherence tomography (OCT) imaging technology.
ABT announced on December 2, that its next-generation, sensor-based glucose monitoring technology, FreeStyle Libre 2, received approval by the Health Canada for adults and children with diabetes.
Recent Financial Results
NVS’ net sales climbed 8% sequentially to $12.3 billion for the third quarter ended September 30, 2020, primarily driven by volume growth of seven percentage points. Operating income increased 2.3% year-over-year to $2.4 billion, while net income increased 3.5% sequentially to $1.9 billion. EPS increased 7.8% year-over-year to $1.52.
ABT’s net sales for the third quarter ended September 30, 2020 have increased 9.6% year-over-year to $8.9 billion. Total sales from medical devices, which accounted for 35.8% of the net sales, increased 3.4% year-over-year to $3.2 billion. Operating earnings increased 24.8% year-over-year to $1.5 billion. And net earnings increased 28.5% year-over-year to $1.2 billion. EPS increased 16.7% year-over-year to $0.98.
Past and Expected Financial Performance
NVS’ EBITDA and EPS have grown at a CAGR of 8.6% and 3.2%, respectively, over the past three years.
The market expects the company’s revenue to increase 3.9% for the quarter ended December 2020, 6.3% for the quarter ending March 2021, and 6.2% in 2021. NVS’ EPS is expected to grow 2.3% for the quarter ended December 31, 2020, 1.3% for the quarter ending March 31, 2021, and 10.4% in 2021. Moreover, its EPS is expected to grow at a rate of 8.1% per annum over the next five years.
In comparison, ABT’s EBITDA and EPS grew at a CAGR of 13.5% and 17.2%, respectively, over the past three years.
The market expects ABT’s revenue to increase 19.7% for the quarter ended December 31, 2020, 24.2% for the quarter ending March 2021, and 14% in 2021. The company’s EPS is expected to grow 42.1% for the quarter ended December 31, 2020, 60% for the quarter ending March 31, 2021, and 23.9% in 2021. Moreover, ABT’s EPS is expected to grow at a rate of 13.3% per annum over the next five years.
Thus, ABT has an edge over NVS here.
NVS’ trailing-12-month revenue is 1.54 times ABT’s . Moreover, NVS is more profitable with a gross margin of 71.7% versus ABT’s 56.9%.
Also, NVS’ ROE and ROA of 13.3% and 6.9%, respectively, compare favorably with ABT’s 10.6% and 4.2%, respectively.
In terms of forward P/E, ABT is currently trading at 30.71x, more expensive than NVS, which is currently trading at 16.21x. Moreover, ABT is more expensive both in terms of trailing-12-month EV/S (6.26x versus 4.91x), and trailing-12-month EV/EBITDA (25.78x versus 13.36x).
In terms of forward PEG, ABT’s 2.65x is 26.8% higher than NVS’ 2.09x.
Though ABT looks more expensive compared to NVS, we think it is worth paying this premium considering ABT’s significantly higher earnings growth potential.
NVS and ABT are rated “Strong Buy” in our proprietary POWR Ratings system. Here’s how the four components of overall POWR Rating are graded for NVS and ABT:
Both NVS and ABT have an “A” for Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. NVS is ranked #2 of 244 stocks in the Medical – Pharmaceuticals industry. ABT is ranked #3 in the same industry.
Both NVS and ABT are good investment bets considering their market dominance and continued innovations. However, ABT appears to be a better buy despite trading at a marginally higher valuation based on its significantly higher revenue and earnings growth potential.
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ABT shares were trading at $108.59 per share on Tuesday morning, down $0.52 (-0.48%). Year-to-date, ABT has declined -0.82%, versus a -1.35% rise in the benchmark S&P 500 index during the same period.
About the Author: Manisha Chatterjee
Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...
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