VTRS

In terms of stock market valuation, the major pharmaceutical sector remains at its steepest discount to the broader U.S. stock market over the past 15 years. We expect to see a unique opportunity for this discount to narrow in due course. Although the next pharmaceutical post-pandemic patent cycle from 2025 to 2030 has been top-of-mind for many U.S. stock market investors, both pipeline progression and business development across the sector leave us with only a relatively modest decrease in top-line sales revenue growth over this time frame. Further, we expect to see an upward bias to bottom-line profit margins on the basis of a mix of both further pipeline progression and capital deployment. As part of the Medicare Part B and Part D reforms and Inflation Reduction Act, U.S. medicine price hikes and limits may lift the overhang on the pharmaceutical sector. This new legislation helps re-rate both P/E and P/B multiples for many U.S. pharmaceutical companies. Our proprietary alpha stock signals skew toward Eli Lilly (LLY) and AbbVie (ABBV) with both the longest runways for EPS growth, operational performance, and attractive stock market valuation as of March 2024. The U.S. pharmaceutical companies with robust fundamental strength in animal health specialty are Zoetis (ZTS) and Horizon (HZNP). The next tier includes Merck (MRK), Pfizer (PFE), Royalty Pharma (RPRX), and Johnson & Johnson (JNJ) with some fresh incremental improvements in Tobin’s q, stock market valuation, and operational performance over the next few years.

We are constructive on these mainstream U.S. pharmaceutical companies with solid product launches and new patent development trends. Although the U.S. pharmaceutical sector may experience a modest decline in top-line sales growth in the next decade, we can expect the current patent development trends to support mid-single-digit top-line sales revenue growth for some U.S. pharmaceutical companies with rare and unique competitive advantages over the next 5-7 years. These U.S. pharmaceutical companies face few patent expirations from early-2026 to late-2029. It is reasonable for us to project more than 5% sales revenue growth per year over the next few years. A recent new product cycle combines with ongoing pipeline success for these U.S. pharmaceutical superstars. These positive trends represent potential upside value drivers to medium-term and longer-run estimates of stock market valuation for these U.S. pharmaceutical companies. In the broader context, both pipeline progression and patent development for prescription medicine should substantially improve the fundamental prospects for these superstars in the U.S. pharmaceutical sector. Beyond solid organic sales and EPS growth, we expect these superstars to leverage their ample balance sheet capacity for additional bolt-on acquisitions, cash dividends, and share repurchases. In the meantime, these U.S. pharmaceutical superstars still trade near their all-time low P/E and P/B multiples relative to the S&P 500. To the extent that this ubiquitous discount in stock market valuation tends to narrow in due course, we believe many investors can benefit substantially from this major stock market investment in some mainstream U.S. pharmaceutical companies.

The next wave of pharmaceutical patent expirations may start to emerge from 2026 to 2029. Many stock market investors continue to focus on bottom-line profit margin growth through this time frame. In time, continual pipeline traction should help gradually ease these broader concerns about stock market valuation. Whether these U.S. pharmaceutical superstars can attract higher P/E and P/B multiples remains an open controversy. The new U.S. legislation should result in more manageable target prices for medications, treatments, and therapies. As this legislation imposes upper limits on medicine prices for the elder Americans, greater demand for price-inelastic medications can help boost both sales and profits for our chosen U.S. pharmaceutical superstars.

$LLY $ABBV $PFE $MRK $BMY $GSK $RP $JNJ $ZTS $AZN $GILD $VTRS $SNY $ELAN $TMUS $T $VZ 

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