Since the COVID-19 pandemic swept the world, healthcare stocks have been hotly traded in the face of turbulent and unpredictable market conditions. Whether investors are interested in speculating on price movements spurred by COVID-19 drug and vaccine development or simply chasing reliable earnings growth stemming from diagnostic-test production, there's something for everyone.
The Swiss pharma giant Novartis (NVS 0.87%) and the lesser-known Spanish multinational Grifols (GRFS 4.54%), which specializes in therapies based on blood plasma, are two competitors in this new and growing market of COVID-19 products. Given that Novartis' market cap of $196.4 billion is more than 10 times Grifols' $18.5 billion or so, how should potential buyers approach the question of which company warrants investment?
Grifols takes aim at the COVID-19 plasma therapeutics market
Grifols has a lot to offer investors seeking steady growth. With a stable of products ranging from blood diagnostics to infusion-ready IV nutrition bags, the company competes in a handful of different markets, and its pipeline features seven different projects in clinical development. Considering its 11.8% year-over-year revenue growth, Grifols is expanding at a steady pace. Grifols has a profit margin of 13.32%, a trailing-12-month return on assets of 5%, and gross profit of $2.34 billion, all of which suggest that the company is healthy.
Since the advent of the pandemic, Grifols has introduced COVID-19 products including a rapid diagnostic test, a non-rapid diagnostic test, and an antibody test to detect past exposure.
Grifols also has a handful of therapies for COVID-19 in development. One of the company's projects aims to treat people with ongoing COVID-19 infections with directly infused blood plasma harvested from recovered COVID-19 patients; another project is exploring the efficacy of existing Grifols therapies like intravenous immunoglobulin. On June 11, Grifols announced that it would start to manufacture doses of a new COVID-19 therapy comprised entirely of isolated antibodies that broadly neutralize COVID-19; it's slated to enter clinical trials in July. Unfortunately for Grifols investors, the market didn't appear to react to the news at all, with the stock experiencing little movement in the days after the announcement.
Novartis reenters the vaccine market while trialing older drugs for COVID-19
With trailing-12-month revenue of $49.9 billion and a profit margin of 24.3%, Novartis is significantly more profitable than Grifols. Novartis' year-over-year revenue growth is comparable to Grifols' at 10.9%, which is remarkable given that Novartis is more than 10 times larger than Grifols.
Novartis has dozens of therapies on the market in a plethora of disease areas, and 42 pipeline programs currently in phase 3 clinical trials. This puts the company in a strong position to grow earnings over the next five years, even before taking its COVID-19 projects into account.
Novartis has a dividend payout ratio of 95.58%, and its current forward dividend yield sits at a respectable 3.66% compared to Grifols' 2.31%. Furthermore, Novartis' high payout ratio shows that its leadership is comfortable using only a small portion of its earnings to invest into growth drivers, most likely due to its powerful drug-development pipeline.
As for its new COVID-19 efforts, Novartis is currently investigating in phase 3 clinical trials whether its popular antibody therapy for autoinflammatory diseases, canakinumab, could be beneficial for COVID-19 patients with severe pneumonia, and also whether its myelofibrosis drug Jakavi might treat runaway inflammation in severe cases of COVID-19. (Emergency-use authorization for trials of hydroxychloroquine has been halted by the U.S. Food and Drug Administration (FDA).)
In 2015, Novartis sold its non-influenza vaccine business to GlaxoSmithKline, but the pandemic has prompted Novartis to reenter the vaccine market to develop a vaccine for COVID-19, via its subsidiary AveXis, in conjunction with Massachusetts General Hospital. If Novartis' vaccine is successful in clinical trials, it's likely to be a blockbuster that could spur intense growth. Look for preliminary clinical trial results in the early fall to see whether the company's approach has merit.
Which stock is a better buy?
Despite both companies participating in multiple COVID-19 projects, both stocks have lost value since the start of the year, with Novartis down 5.5% and Grifols down 16.4%. Investors in either company may want to carefully balance their portfolios to guard against further losses.
Nonetheless, Novartis may be better for investors than Grifols; its trailing-12-month earnings per share were $5.26 compared with Grifols' $0.60. Moreover, the company's earnings growth is comparable to Grifols', and its exposure to potential upside from successful pipeline projects is much higher, simply because it has far more projects. Though Novartis' dividend is also larger than Grifols', that's mostly icing on the cake.
While Grifols has more room to grow than Novartis over the long term, in the short and medium terms Novartis will benefit from being a more established and more diversified competitor.