JPMorgan is eyeing some drugmakers ahead of their earnings reports as investors continue to sell shares of major technology companies. Key market trends in the first half of 2024 have shifted, prompting a rotation out of big tech stocks into less-loved areas of the market, including value and small-cap stocks. The S&P 500 fell about 0.8% last week, while the Dow Jones Industrial Average, whose components include Johnson & Johnson and Merck, added nearly 0.8%. This backdrop has analyst Chris Schott reviewing JPMorgan’s top pharmaceutical and biotech stocks, which include “stories that have clear upside potential for long-term estimates,” such as Eli Lilly and Merck.[W]“We 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 that allow Medicare to negotiate directly with drugmakers to lower the cost of certain drugs. “Overall, we continue to see a mid-single-digit EPS impact on the U.S. core pharma group by the end of the decade due to IRA, but we do not view this as a reason to avoid the sector,” the analyst added. Here’s a look at some of the stocks on JPMorgan’s list. Eli Lilly Pharmaceutical company Eli Lilly made the list. Its shares have advanced nearly 40% through 2024. Schott said the firm is somewhat below Wall Street’s consensus estimates for Eli Lilly heading into second-quarter results on Aug. 8. The analyst notes that any potential upside in the quarter for Mounjaro and Zepbound, Lilly’s tirzepatide drugs that treat type 2 diabetes, could be a major headwind. and weight management, respectively, could be offset by supply chain hurdles related to diabetes treatment Trulicity. LLY YTD mountain Eli Lilly stock. Longer term, however, Schott sees Mounjaro and Zepbound sales growing from $16.5 billion in 2024 to $27 billion and $36.5 billion in 2025 and 2026, respectively. “[W]“While there have been a number of early-stage pipeline updates from competitors in the obesity space, we do not see these players differentiating themselves or likely to dislodge significant 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 second-quarter earnings of $2.75 per share and revenue of about $10 billion. Merck The pharmaceutical giant’s stock has gained more than 16% in 2024. The firm is scheduled to report second-quarter results on Tuesday before the opening bell. Schott said Merck has “the cleanest setup” heading into quarterly results, driven by growth in its cancer treatment Keytruda and human papillomavirus vaccine Gardasil. MRK YTD mountain Merck stock. “MRK stock has underperformed the peer group in July, which we see as largely a result of positioning (versus anything fundamental) and we see the stock looking increasingly attractive at 12.5x 2025 EPS based on core product mix. “We have plenty of growth potential and a deep late-stage pipeline,” the analyst said. Analysts surveyed by FactSet expect Merck to post second-quarter earnings of $2.16 per share on revenue of nearly $15.9 billion. Regeneron Pharmaceuticals is also among the company's top picks, with shares up about 23% for 2024. Regeneron is scheduled to report second-quarter results on Thursday before the opening bell. Analysts surveyed by FactSet expect earnings of $10.61 per share on revenue of nearly $3.4 billion.
