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What are we looking for?

U.S.-listed pharmaceutical companies with reliable earnings.

The screen

Canadians have been inundated with news on COVID-19 over the past two years, including case counts, new variants, vaccinations – and pharmaceutical companies. Pfizer Inc. has dominated headlines about the virus and has led in revenue generation from COVID-19 vaccination sales. But several other important segments contribute to profitability in the pharmaceutical industry.

Today we use Refinitiv’s proprietary StarMine Earnings Quality Model to look for investments opportunities among larger names, with the focus on consistently solid earnings.

  • First, we screen for pharmaceutical companies traded in the United States with a market capitalization of more than US$100-billion.
  • Then we screen for companies with an Earnings Quality (EQ) Model score of 70 or higher. The EQ Model is a percentile ranking of stocks based on the sustainability of earnings, with 100 representing the highest rank.

StarMine defines “earnings quality” as a measure of the degree to which past earnings are reliable and are likely to persist. High-quality earnings accurately reflect a company’s current and past operating performance, are indicative of future operating performance, and are reliable valuation measures for the company.

The EQ Model is broken down into four components: accruals, cash flow, operating efficiency and exclusions. (”Exclusions” are items that may be removed from a financial statement to improve reported figures; the EQ Model determines whether they should be added back to the statement to get an accurate picture of earnings.)

More about Refinitiv

Refinitiv, a London Stock Exchange Group business, is one of the world’s largest providers of financial market data and infrastructure, serving more than 40,000 institutions worldwide. Refinitiv provides information, insights and technology that drive innovation and performance in global financial markets, enabling the financial community to trade smarter and faster, overcome regulatory challenges and scale intelligently.

What we found

U.S.-listed pharmaceutical companies with reliable earnings

CompanyTickerMkt. Cap. (US$ Mil.)EQ* Model ScoreFisc. 2020 Rev. (US$ Mil.)Div. Yld. (%)1Y Ttl. Rtn. (%)"Recent Price
Novo Nordisk A/SNVO-N177,402.610020,836.81.455.299.78
Pfizer Inc.PFE-N315,667.610041,908.02.854.856.24
Eli Lilly and Co.LLY-N248,819.29724,539.81.542.0260.11
Zoetis Inc.ZTS-N100,586.5926,675.00.626.2212.60
Bristol-Myers SquibbBMY-N144,498.99142,518.03.33.565.10
Merck & Co. Inc.MRK-N208,062.09147,994.03.45.382.37
Johnson & JohnsonJNJ-N455,676.28882,584.02.511.4173.09
Roche Holding AGRHHBY-OTC353,036.68165,894.22.519.150.67

Source: Refinitiv

* Earnings Quality

The screen resulted in eight pharmaceutical companies. Here are three to highlight:

Pfizer tied at the top with an EQ score of 100. The company’s large portfolio of patented drugs helps generate strong cash flows year after year. Its size in the industry has helped it build one of the largest economies of scale, key in a business that requires large amounts of funding for drug development.

Pfizer recently received U.S. regulatory emergency use authorization for its COVID-19 oral antiviral treatment, Paxlovid. The treatment, which can be taken at home, has been shown to significantly reduce hospitalizations. Since the announcement on Dec. 22, several analysts have increased their price target for the company’s stock.

Novo Nordisk AS operates through two business segments: diabetes and obesity care, and biopharmaceuticals. Novo shares the top spot with Pfixer with an EQ score of 100. Its stock price also improved the most over the past year, adding 55 per cent in total return. The company, a leader in diabetes care, currently holds 30 per cent of the diabetes treatment market and approximately half of the insulin market. However, the insulin market has been around for decades and Novo is constantly facing pricing pressure from competitors including Sanofi SA and Eli Lilly and Co. – the latter registering an EQ score of 97 on our list.

Nonetheless, the company is well positioned to defend its market share with its encouraging pipeline of new treatment options.

Johnson & Johnson, which scored an 88 on the EQ Model, operates through three segments: consumer, pharmaceutical and medical devices. The company is one of the largest pharmas globally, with a market cap of more than US$455-billion. It generates the highest revenue in the industry, with more than US$82-billion reported in 2020, about half of which is pharmaceutical sales.

J&J’s strong free cash flow has allowed the firm to increase its dividend consistently for more than 50 years. In addition, its diversification in several health care segments has prepared it well for any downturns in the economy. However, strong competition and a weak late-stage drug pipeline could hinder long term growth potential.

Investors are advised to do their own research before trading in any of the securities shown.

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