Many analysts expect the economy to witness recessionary pressures due to the lingering macroeconomic and geopolitical headwinds. The U.S. GDP declined at a 1.4% annualized pace in the first quarter, below analysts’ expectation of a 1% gain. State Street Global Advisors’ Chief Economist Simona Mocuta said, “It reminds us of the reality that growth has been great, but things are changing, and they won’t be that great going forward.”
Inflation has surged to its highest level in four decades, and the March jobs data suggested a tight labor market. Moreover, peace talks between Russia and Ukraine have shown no progress. As a result, supply disruptions continue to worsen, and energy and commodity prices remain at uncomfortably high levels.
Crude oil prices have been hovering consistently above $100 per barrel. And historically, high crude oil prices have precipitated recessionary conditions. Moreover, the EU is contemplating banning Russian oil imports by the end of the year, and factory activity is shrinking in China, which could disrupt the crude oil market further, leading to a surge in prices.
In an effort to tame the surging inflation, the Fed plans aggressive interest rate hikes. The Fed is on the cusp of its most aggressive tightening in 28 years. The central bank is expected to announce a 50-basis point interest rate hike on May 4, 2022. The aggressive interest rate hikes aim to prevent consumers and businesses from spending by making borrowing more expensive, cooling demand, and keeping prices under control. However, many economists are concerned that if the Fed raises the interest rates too quickly and aggressively, it might push the economy into a recession.
The pharmaceutical industry has been known to do well amid recessionary conditions due to the highly inelastic demand for its products. People cannot cut back on their medical expenditure irrespective of the economic cycle.
This is why today I am going to analyze three prominent stocks from the pharmaceutical industry, Bristol-Myers Squibb Company (BMY), Bayer Aktiengesellschaft (BAYRY), and Takeda Pharmaceutical Company Limited (TAK), which are well-positioned to withstand an economic slump.
Click here to checkout our Healthcare Sector Report for 2022
Pharma: A Recession-Proof Industry?
The pharmaceutical industry is involved in discovering, developing, producing, and marketing drugs and vaccines. The industry has taken rapid strides with advancements in science and technology.
The pharmaceutical industry has been in the limelight since the onset of the COVID-19 pandemic. The pandemic has highlighted the importance of pharma companies as they developed life-saving vaccines and treatments to fight the deadly virus. The development of vaccines from scratch was done in record time, which highlighted the growing capabilities of pharmaceutical companies.
The pharma industry has stood out even during economic downturns. In the recessionary periods of the early 1990s, early 2000s, 2007-2009, the pharmaceutical industry had outperformed the markets. Although their expenditure on Research and Development (R&D) and early-stage funding might be affected during a recession, a bad economy does not mean people will curtail their medical expenditure. In fact, the health care expenditure per capita growth has beaten the personal consumption growth in the U.S. since 1980.
The pharmaceutical industry is less likely to be affected by macroeconomic headwinds as diseases will always exist, and treatments and medicines will always be in demand irrespective of economic turbulence. People are more likely to curtail their discretionary spending rather than cut down on healthcare expenses.
The pharma industry is not cyclical like other industries and is mostly immune to the ups and downs witnessed by the economy. It acts as a defensive play for investors. Moreover, its earnings and cash flows remain stable even during economic contraction. The industry has a stable and predictable pattern of demand that enables its constituents to outperform even during an economic downturn.
Apart from the various diseases arising from poor lifestyle choices, the rapidly aging population is also expected to increase the demand for medicines. According to the World Population Prospects, one in eleven individuals was over 65 years old in 2019. This is expected to reach one in six individuals by 2050.
According to the “The Global Spending and Usage of Medicines 2022: Outlook to 2026” report, the global spending on medicines is expected to grow at a CAGR of between 3% and 6%, reaching about $1.8 trillion by 2026.
Prominent Industry Participants
Merck & Co., Inc. (MRK) and Novo Nordisk A/S (NVO) are two major industry participants. While MRK has returned 20.2% over the past year, NVO has gained 21.5% over the past nine months. MRK has a market capitalization of $220.21 billion, while NVO has a market cap of $257.28 billion.
NVO’s CEO, Lars Jorgensen, said, “We are going to invest significantly in building resilience in our supply chain, so we are set up to grab the opportunities we have in the future.”
3 Pharmaceutical Stocks to Buy Now
Bristol-Myers Squibb Company (BMY)
BMY develops, licenses, manufactures and markets biopharmaceutical products worldwide. It offers products for hematology, oncology, cardiovascular, immunology, fibrotic, neuroscience, and COVID-19.
Analysts expect BMY’s EPS and revenue for fiscal 2023 to increase 6.3% and 3.7% year-over-year to $8.11 and $48.33 billion, respectively. It surpassed Street EPS estimates in each of the trailing four quarters. Over the past six months, the stock has gained 26.4% to close the last trading session at $75.05.
In terms of trailing-12-month gross profit margin, BMY’s 80.13% is 45.2% higher than the industry average of 55.18%. Also, its trailing-12-month EBIT margin and EBITDA margin of 22.19% and 44.91% are higher than the industry averages of 1.05% and 4.29%, respectively.
BMY’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It has an A grade for Value and a B grade for Growth and Quality. It is ranked #5 out of 169 stocks in the Medical – Pharmaceuticals industry. Click here to see the other ratings of BMY for Momentum, Stability, and Sentiment.
Bayer Aktiengesellschaft (BAYRY)
BAYRY operates as a life science company worldwide. It operates through Pharmaceuticals, Consumer Health, and Crop Science segments.
For the quarter ending March 31, 2022, BAYRY’s EPS is expected to increase 76.9% year-over-year to $0.69. Its revenue for fiscal 2023 is expected to increase 3.4% year-over-year to $53.34 billion. It surpassed consensus EPS estimates in three of the trailing four quarters. The stock has gained 20.9% year-to-date to close the last trading session at $16.04.
In terms of trailing-12-month gross profit margin, BAYRY’s 61.33% is 11.1% higher than the industry average of 55.18%. Also, its trailing-12-month EBIT margin and EBITDA margin of 16.22% and 19.11% are higher than the industry averages of 1.05% and 4.29%, respectively.
BAYRY’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.
It has an A grade for Value and a B grade for Growth and Stability. It is ranked #14 in the same industry. To see the other ratings of BAYRY’s for Momentum, Sentiment, and Quality, click here.
Takeda Pharmaceutical Company Limited (TAK)
Headquartered in Tokyo, Japan, TAK is engaged in researching, developing, manufacturing, and selling pharmaceutical products, general medical products, quasi-drugs, and healthcare products in Japan and overseas. The company’s research and development (R&D) functions are concentrated in four areas of oncology, digestive system diseases, rare diseases, and neurology, and two business units of plasma fractionation products and vaccines.
TAK’s EPS for fiscal 2023 is expected to increase 34.5% year-over-year to $0.91. Its revenue for fiscal 2022 is expected to increase 380.1% year-over-year to $26.63 billion. The stock has gained 6.8% year-to-date to close the last trading session at $14.56.
In terms of trailing-12-month gross profit margin, TAK’s 69.63% is 26.1% higher than the industry average of 55.18%. Also, its trailing-12-month EBIT margin and EBITDA margin of 17.03% and 31.57% are higher than the industry averages of 1.05% and 4.29%, respectively.
TAK’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.
It has an A grade for Value and a B grade for Stability. Again, it is ranked #36 in the same industry. Click here to see the other ratings of TAK for Growth, Momentum, Sentiment, and Quality.
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REVISED: 2023 Stock Market Outlook (includes top 7 picks)
BMY shares were trading at $74.96 per share on Wednesday morning, down $0.09 (-0.12%). Year-to-date, BMY has gained 22.17%, versus a -12.30% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...
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