Trying to time the market doesn't really work. The best way for retail investors to earn dependable returns is by investing for the long term in solid companies that are temporarily out of favor.
Eli Lilly's (LLY -2.77%) shares are down 4% this year (after falling as much as 15% at one point last month), while Johnson & Johnson (JNJ -0.43%) stock has fallen over 12%, and Merck (MRK -0.58%) is down 2% in 2023.
All three healthcare companies spend heavily on research and development (R&D), allowing them to use their pipelines to continually replace older drugs that are losing patent protection. In addition, all three have consistently raised their dividends:
JNJ Dividend Yield data by YCharts.
Mounjaro will promote explosive growth for Eli Lilly
Eli Lilly's 2022 financials weren't bad, just not spectacular. While earnings per share (EPS) were up 13% from the previous year, to $6.90, the company's revenue was up only 1% to $28.5 billion. Those numbers hide what's coming for Lilly, as it spent $7.2 billion on R&D in 2022. The company now has 10 therapies with strong growth potential, led by diabetes drug Mounjaro.
Approved by the Food and Drug Administration (FDA) last May to lower blood sugar levels in type 2 diabetes patients, the drug was launched in June; over the rest of 2022, it brought in $482.5 million.
Mounjaro is also being hailed as a next-generation weight-loss treatment. Lilly's study on obese patients without diabetes showed that the highest dose (15 milligrams) could reduce a patient's body weight by an average of 22.5%, making it the first drug to have the potential to reduce more than 20% of body weight.
Lilly has begun a rolling submission for Mounjaro to treat obesity. If the FDA approves it to treat weight loss, UBS analysts believe the drug could be worth $25 billion in peak annual sales, topping the $21.2 billion that AbbVie immuno-oncology blockbuster Humira brought in during 2022.
Some of the other therapies that are seeing big gains include breast cancer drug Verzenio, which brought in $2.5 billion in 2022, up 84%; diabetes drug Jardiance, which had nearly $2.1 billion in 2022 revenue, up 39%; and diabetes therapy Trulicity, which had $7.4 billion in 2022 revenue, up 15%.
Two more blockbuster drugs could be on the way as well. The FDA approved Jaypirca to treat mantle cell lymphoma. And if Lilly's lead Alzheimer's therapy, donanemab, is approved, it could pull in a few billions annually. (The FDA rejected the drug's accelerated approval application based on early results, but the drug is still in three phase 3 trials to treat patients with early Alzheimer's symptoms, with at least one top-line readout expected in the second quarter.) Another promising Alzheimer's drug, remternetug, is in a phase 3 trial; like donanemab, it targets amyloid plaques in the brain.
Eli Lilly's dividend isn't spectacular, offering a current yield of around 1.2%. However, it was just raised by 15% this year to $1.13 per share quarterly; this is the ninth consecutive year Lilly has increased the dividend and the fifth consecutive year it increased it by 15%. With a 77% payout ratio, the dividend is safe for now, though that high a ratio may prevent future double-digit increases.
Johnson & Johnson keeps its growth going
Johnson & Johnson's revenue has increased for seven consecutive years, including a 1.3% gain in 2022 to $94.9 billion. The company said it expects another year of revenue growth, predicting between $96.9 billion and $97.9 billion in 2023, up 4.5% to 5.5%. The one down note was that yearly EPS was down 13.8% to $6.73.
J&J operates in three segments -- consumer healthcare, medtech solutions, and pharmaceuticals -- though consumer healthcare, the only segment that didn't see a revenue gain last year, is being spun off sometime later this year. After that, the company will have a little less diversity, but likely higher margins.
It spent $14.6 billion last year on R&D, more than full-year sales at some smaller companies. In pharmaceuticals, the company had one immunology drug, Tremfya, a therapy for plaque psoriasis and psoriatic arthritis, which increased sales 25.4% to $2.6 billion. It also had two oncology drugs with double-digit gains: multiple myeloma drug Darzalex, with nearly $8 billion in 2022 sales, up 32.4%; and Erleada, a prostate cancer drug which saw sales jump 45.7% nearly to $1.9 billion.
In medtech, the $16.6 billion acquisition of heart-pump maker Abiomed is expected to be accretive to J&J's bottom line by next year. In fiscal 2022, Abiomed had $1.03 billion in revenue and EPS of $4.44. The company said the deal will be slightly dilutive to or neutral for its EPS this year, but should add $0.05 to EPS in 2024 and more thereafter.
Johnson & Johnson has been a safe-harbor stock in tough economic times, and its dependable dividend makes it a solid long-term choice. The company raised its quarterly dividend by 6% last year to $1.13 per share, the 60th consecutive year it's increased the dividend. That dividend currently yields nearly 3%, and the payout ratio of 68% is considered safe, considering J&J's consistent cash flow. Over the past decade, the company has increased the dividend by over 71%.
Keytruda powers Merck's rise
Of these three stocks, Merck had the biggest jump in revenue last year, rising 22% to $59.3 billion. It also had yearly EPS of $5.71, up from $5.14 in 2021.
The company's 2022 rise was led by cancer drug Keytruda, which had sales of $20.9 billion, up 22%; human papillomavirus (HPV) vaccines Gardasil and Gardasil 9 combined for sales of $6.9 billion, up 22%.
Keytruda, an anti-PD-1 ("PD-1" is a "programmed death 1 receptor") therapy that helps the body's immune system find and destroy tumor cells, has been approved for more than 18 different types of cancers. The drug is in more than 1,600 trials to treat various cancers. It just gained full approval from the FDA to treat pediatric and adult patients with solid tumors that are unresectable or metastatic, and classified as high microsatellite instability (MSI-H) or mismatch repair-deficient (dMMR), as determined by an FDA-approved test. This is the first full approval for an immunotherapy based on a predictive biomarker, regardless of solid tumor type.
However, knowing that it needs to broaden its revenue beyond Keytruda, the company is spending big on R&D, including $13.5 billion in 2022. That effort appears to be paying off with new therapies.
Merck announced good news on March 6 about Sotatercept as a treatment for pulmonary arterial hypertension (PAH). In a recent phase 3 trial, Sotatercept reduced the risk of death or clinical worsening of PAH by 84% compared to the placebo. J.P. Morgan analyst Chris Schott told Reuters that Soteracept could bring in peak annual sales of $3 billion to $4 billion.
The company has another potential blockbuster in cholesterol drug MK-0616, which had promising results in a phase 2b clinical trial on 381 participants ages 18 to 80 with hypercholesterolemia -- high levels of low-density lipoprotein (LDL) cholesterol. Hypercholesterolemia is a major risk factor for atherosclerotic cardiovascular disease, which contributes to what the World Health Organization says were the top two causes of death worldwide as of 2019: ischemic heart disease, and stroke. The key for MK-0616 is that it may be effective when statins alone won't lower cholesterol. According to Credit Suisse analyst Trung Huynh, the therapy could reach peak annual sales of $5 billion.
COVID-19 treatment Lagevrio (molnupiravir) is facing reduced sales this year. So the company's forecast for 2023 revenue is down slightly, between $57.2 billion to $58.7 billion, though EPS is expected to rise to between $5.86 and $6.01.
Merck raised its quarterly dividend by 6% last year to $0.73, giving it a current yield of 2.7%. It has increased its quarterly dividend for 12 consecutive years, and its payout ratio is under 48%, so there's plenty of room for future increases. Over the past decade, Merck has increased its dividend by close to 70%.
