In this piece, I evaluated two pharma stocks, Johnson & Johnson (JNJ) and Madrigal Pharmaceuticals, Inc. (MDGL) to determine which has the potential for better reasons. Based on the fundamental comparison of these stocks, I believe JNJ is a worthier investment for October for the reasons explained throughout this article.

The rapidly aging population globally and increasing incidence of chronic diseases such as diabetes, cardiovascular disorders, and cancer boost the demand for innovative treatments, propelling the growth and expansion of the pharmaceutical industry. According to Statista, revenue in the pharmaceuticals market is expected to reach $1.12 trillion in 2023.

In global comparison, most of the revenue will be generated in the United States (approximately $603.40 billion this year). Further, revenue is projected to grow at a CAGR of 5.8%, resulting in a market size of $1.48 trillion by 2028.

In addition, pharma companies invest heavily in research and development (R&D) to discover new, advanced medicines, vaccines, and treatments to cater to growing patients’ needs. In 2022, the FDA approved 37 new drugs, of which 20 were chemical entities and 17 were biologics.

Growing digital transformation globally is shaping the pharmaceutical industry. For faster drug discovery and development, supply chain management, and better patient outcomes, firms are increasingly adopting emerging digital technologies like Artificial Intelligence (AI), machine learning, cloud computing, the Internet of Things (IoT), and big data.

As per a report by Grand View Research, the global AI in drug discovery market is expected to reach $9.10 billion by 2030, expanding at a CAGR of 29.6% from 2023 to 2030.

Moreover, the pharma industry tends to perform well regardless of what’s happening with the economy due to the inelastic demand for its products. Thus, pharma companies JNJ and MDGL are well-positioned to benefit from the industry’s tailwinds.

JNJ has declined 1.5% over the past three months, while MDGL plunged 37.2%. JNJ has slumped 10.7% over the past nine months, compared to MDGL’s 52.3% decline. However, JNJ fell 4% over the past year, while MDGL gained 97.4%.

But here are the reasons why we think JNJ could perform better in the near term:

Latest Developments

On July 24, JNJ launched an exchange offer for the separation of Kenvue Inc. (KVUE). Through this exchange offer, Johnson & Johnson shareholders can exchange all, some or none of their shares of Johnson & Johnson common stock for shares of Kenvue common stock.

“The separation of Kenvue further sharpens Johnson & Johnson’s focus on transformational innovation specifically in Pharmaceutical and MedTech,” said Joaquin Duato, Chairman and CEO of JNJ. “We believe now is the right time to distribute our Kenvue shares, and we are confident that a split-off is the appropriate path forward to bring value to our shareholders.”

On September 13, MDGL announced New Drug Application (NDA) acceptance and Priority Review by the U.S. Food and Drug Administration (FDA) for resmetirom. The FDA’s acceptance of its NDA with Priority Review is an important step forward as MDGL pursues its goal of delivering the first approved treatment to patients with NASH with liver fibrosis.

Recent Financial Results

JNJ’s sales increased 6.3% year-over-year to $25.53 billion in the second quarter that ended June 30, 2023. Its gross profit was $17.32 billion, up 7.6% year-over-year. The company’s adjusted net earnings and adjusted EPS came in at $7.36 billion and $2.80, representing increases of 6.5% and 8.1% from the prior year’s quarter, respectively.

For the second quarter that ended June 30, 2023, the pre-revenue company MDGL reported a loss from operations of $86.45 million, compared to $70.27 million from the prior year’s quarter. In addition, its net loss and net loss per common share widened by 21.3% and 13.3% year-over-year to $85.80 million and $4.69, respectively.

Past And Expected Financial Performance

JNJ’s revenue and EBITDA have grown at respective CAGRs of 6.7% and 8.2% over the past three years. The company’s normalized net income has increased at a CAGR of 11.9% over the same period. Also, over the same timeframe, its total assets and levered free cash flow have improved at CAGRs of 6.6% and 4.3%, respectively.

For the fiscal year ending December 2024, JNJ’s revenue is expected to increase 3.8% year-over-year to $87.79 billion. Likewise, analysts expect the company’s earnings per share for the next year to grow 8.8% from the prior year to $10.91. Also, its EPS is expected to increase 5.8% per annum over the next five years.

Over the past three years, MDGL’s tangible book value has declined at a 32.9% CAGR, while the company’s total assets have decreased at an 8% CAGR.

Analysts expect MDGL’s loss per share for the fiscal year (ending December 2023) to widen 11.6% from the previous year to $19.23. Furthermore, the company is expected to report a loss per share of $14.95 for the fiscal year 2024.

Profitability

JNJ is more profitable, with a trailing-12-month Return on Equity (ROE) of 17.09% compared to MDGL’s negative 352.65%. JNJ’s trailing-12-month Return on Assets (ROA) of 8.68% favorably compared to MDGL’s negative 114.35%. Also, JNJ’s trailing-12-month Return on Total Capital (ROTC) of 14.64% is higher than MDGL’s negative 122.80%.

Additionally, JNJ’s trailing-12-month cash from operations of 19.07 billion compared with MDGL’s negative 276.96 million.

Valuation

In terms of fiscal year three non-GAAP P/E, JNJ is currently trading at 13.81x, 60.1% lower than MDGL, which is trading at 34.65x. In addition, JNJ’s trailing-12-month Price to Book multiple of 5.40 is lower than MDGL’s 24.77.

Thus, JNJ is relatively more affordable.

POWR Ratings

JNJ has an overall rating of A, which equates to a Strong Buy in our proprietary POWR Ratings system. Conversely, MDGL has an overall rating of D, translating to a Sell. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. JNJ has a B grade for Growth, in sync with its robust financials in the last reported quarter and impressive historical growth.

On the other hand, MDGL has a grade of D for Growth, consistent with its poor financials and disappointing historical growth.

Of the 157 stocks in the Medical - Pharmaceuticals industry, JNJ is ranked #6, while MDGL is ranked #135.

Beyond what we’ve stated above, we have also rated both stocks for Stability, Momentum, Sentiment, Value, and Quality. Click here to view JNJ Ratings. Get all MDGL ratings here.

The Winner

The pharmaceutical sector’s prospects appear promising, driven by the escalating incidence of chronic diseases, a rapidly aging population worldwide, consistent R&D efforts by industry players for drug discovery and development, and the growing adoption of emerging digital technologies.

Given the industry’s robust outlook and non-cyclical nature, pharma stocks JNJ and MDGL are poised to grow considerably. However, MDGL’s relatively poor financials, elevated valuation, low profitability, and bleak prospects make its competitor, JNJ, the better investment this month.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Medical - Pharmaceuticals industry here.

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

2024 Stock Market Outlook >

JNJ shares were unchanged in premarket trading Thursday. Year-to-date, JNJ has declined -9.63%, versus a 15.36% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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