Arguably the most important quality for any stock is whether or not it beats the market. If it doesn't, you'd be better off putting your money in an index fund.
Three Motley Fool contributors think healthcare stocks Eli Lilly (LLY 1.19%), Novo Nordisk (NVO 0.84%), and Vertex Pharmaceuticals (VRTX -0.06%) will not only beat the market in 2024, but trounce it. Here's why.
This high-flying biotech has major catalysts ahead
Prosper Junior Bakiny (Eli Lilly): It's difficult to find many biotech stocks that have garnered more attention than Eli Lilly over the past year. It is a leader in the weight-loss drug market thanks to its highly popular treatment, Zepbound. Wall Street analysts have exceptionally high expectations for the drug, generically known as tirzepatide, which helped drive Eli Lilly's stock price higher. And there is more where that came from.
The drugmaker is expecting data readouts from several phase 3 trials, as well as regulatory submissions for its new crown jewel this year, including as a treatment for sleep apnea. Considering how important tirzepatide is for Eli Lilly's future, the market will be closely monitoring its clinical and regulatory progress. Positive results should help Eli Lilly's stock move in the right direction.
The biotech could also earn approval for donanemab as a treatment for Alzheimer's disease. It's been hard to develop effective Alzheimer's therapies, and the need for them is on course to get significantly greater in the years ahead as the population of seniors globally grows. Donanemab delivered excellent results in late-stage studies, meaningfully slowing cognitive decline, so it should have a great shot at approval.
Lastly, Eli Lilly's revenue growth should be even stronger than it was last year. The company earned several new approvals that will contribute to the top line, and it will no longer have to deal with the challenging year-over-year comparisons that resulted from its COVID-19 antibody sales, which completely evaporated last year. That could all lead to superior returns this year for Eli Lilly.
This biotech's long-term prospects continue to get brighter. Investors won't want to miss out on this top stock.
Novo Nordisk's numbers could look even better this year
David Jagielski (Novo Nordisk): It wouldn't be surprising to see Novo Nordisk have another strong year in 2024. The company still has a long way to go before it's close to capping out its growth opportunities. Ozempic and Wegovy -- its two blockbuster versions of semaglutide -- are going to be strong revenue drivers for the business for the foreseeable future.
Last year, the company's revenue grew by 31% to 232 billion Danish kroner ($34.8 billion). Leading the charge was its diabetes medication, Ozempic (which many people have been using off-label for weight loss), with its sales rising by 60% from a year ago. But what may be most promising is that the version of semaglutide approved for weight loss, Wegovy, reported five times more revenue than a year ago.
And as impressive as those numbers are, they could get even better for Novo Nordisk. Its parent company, Novo Holdings, recently announced plans to acquire Catalent, which is a manufacturing subcontractor that produces (among other medications) Wegovy. The move will help Novo Nordisk increase the supply of the drug, which has been a problem for the company as demand has been through the roof.
That demand could grow even higher if the Food and Drug Administration grants a label expansion for Wegovy as a treatment to help reduce the risk of cardiovascular disease. A decision on that application could come within the first half of this year. If the regulator gives it approval, there would be more of a reason for doctors to prescribe the drug to patients, and more of an incentive for insurance companies to provide coverage.
Trading at 35 times its estimated earnings, Novo Nordisk's stock might look expensive at first glance. However, much more growth could be coming for the business, and with that potential factored in, the stock's valuation is attractive.
Multiple growth drivers for this big biotech
Keith Speights (Vertex Pharmaceuticals): What's the most important requirement for a stock to trounce the market? My answer is that investors have to expect that significant earnings growth is on the way. And I think that Vertex Pharmaceuticals is poised to deliver significant earnings growth.
Some of that growth will come from the company's cystic fibrosis drugs. Vertex is working hard to expand their labels and secure more reimbursement deals for its currently approved therapies. It will also soon file for regulatory approvals of its vanzacaftor triple-drug combo. Not only will this combo be the most powerful and convenient cystic fibrosis therapy yet for Vertex if approved, but it would also almost certainly become the most profitable due to lower royalty payments.
Recently approved Casgevy will contribute additional earnings growth. I expect that 2024 will primarily be a ramp-up year for the gene-editing therapy. However, Casgevy could reach peak annual sales in the ballpark of $3.9 billion, according to Goldman Sachs.
We can add VX-548 to the list of growth drivers as well. Vertex plans to file for U.S. approval of the non-opioid pain drug by mid-2024. COO Stuart Arbuckle said on the Q4 conference call that the company thinks there's a "multibillion-dollar opportunity for VX-548 in acute pain alone." Vertex is also evaluating the drug in treating peripheral neuropathic pain.
In addition, Vertex expects to advance inaxaplin into phase 3 testing in the current quarter. The drug targets APOL1-mediated kidney disease, which impacts more patients than cystic fibrosis does.
Vertex's shares might seem expensive by some valuation metrics. However, I think the most important one to consider for the stock is its price/earnings-to-growth (PEG) ratio of 0.58. This low PEG ratio underscores just how much earnings growth Vertex could deliver over the next few years.
