JPMorgan is eyeing a few drug manufacturers ahead of their earnings reports as investors continue to sell out of major technology firms. Major market trends in the first half of 2024 have shifted and sparked a rotation out of large technology stocks into less-loved areas of the market, including value stocks and small caps. The S & P 500 dropped about 0.8% last week, while the Dow Jones Industrial Average — whose constituents include Johnson & Johnson and Merck — added nearly 0.8%. This backdrop has analyst Chris Schott reviewing JPMorgan’s top pharmaceutical and biotechnology stocks, which includes “stories that have clear upside potential to longer-term estimates” like Eli Lilly and Merck. “[W]e remain constructive on the group as we believe the combination of core product growth, new launches and business development will more than offset the sector’s patent cycle and IRA headwinds,” Schott wrote in a Monday note, referring to provisions in the Inflation Reduction Act which allow Medicare to negotiate directly with drug manufacturers to lower the cost of certain drugs. “Overall, we continue to see a mid-single-digit EPS impact on the US Major Pharma group by the end of the decade from the IRA but do not see it as a reason to avoid the sector,” the analyst added. Here’s a look at some of the stocks that made the JPMorgan list. Eli Lilly Pharmaceutical company Eli Lilly made the list. Its shares have advanced nearly 40% in 2024. Schott said the firm is somewhat below consensus Wall Street estimates for Eli Lilly heading into second-quarter results on Aug. 8. The analyst notes that any potential upside in the quarter from Mounjaro and Zepbound — Lilly’s tirzepatide medications that treat Type 2 diabetes and manage weight, respectively — could be offset from supply chain headwinds tied to diabetes treatment Trulicity. LLY YTD mountain Eli Lilly stock. Over the long term, however, Schott forecasts sales of Mounjaro and Zepbound growing from $16.5 billion in 2024 to $27 billion and $36.5 billion in 2025 and 2026, respectively. “[W]hile there have been a number of early stage pipeline updates from competitors in the obesity space, we do not see these agents as differentiated or as likely to dislodge meaningful share and our view that LLY and Novo will remain dominant in the incretin space remains unchanged,” the analyst added. Analysts polled by FactSet forecast earnings of $2.75 per share in the second quarter and revenue of roughly $10 billion. Merck Shares of the pharmaceutical giant have gained more than 16% in 2024. The firm is scheduled to report second-quarter results on Tuesday before the opening bell. Schott said that Merck has “the cleanest setup” heading into quarterly results, driven by growth of its cancer treatment Keytruda and human papillomavirus vaccine Gardasil. MRK YTD mountain Merck stock. “MRK shares have underperformed the group in July, which we see as largely a result of positioning (vs anything fundamental) and we see the stock as increasingly compelling at 12.5x 2025 EPS based on the combination of core product upside and a broad late-stage pipeline,” the analyst said. Analysts polled by FactSet expect Merck to notch earnings of $2.16 per share in the second quarter on revenue of nearly $15.9 billion. Regeneron Pharmaceuticals is also among the firm’s top picks, and its shares have climbed about 23% in 2024. Regeneron is scheduled to report second-quarter results on Thursday before the opening bell. Analysts polled by FactSet expect earnings of $10.61 per share on revenue of almost $3.4 billion.
