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A Pfizer research and development facility in Pearl River, N.Y.
Amir Hamja/Bloomberg
You could guess which pharmaceutical stocks will have the most success in developing their drug pipelines. Or you could simply buy a handful of the cheap ones.
Pharma companies can be alluring because the ones that are planning to move new drugs to market can have huge upside. But some are expensive, and any setbacks could hurt the stock.
Eli Lilly
(ticker: LLY), for example, trades at 49 times expected earnings per share for the next 12 months, as the stock has rallied 41% in the past 12 months. Sales of its Type 2 diabetes treatment Mounjaro are expected to grow over sixfold to $20 billion in 2027, while the company also moves its Alzheimer’s treatment, donanemab, through the trial process. Any disappointment would hurt the shares.
Cheap pharma stocks are a better bet. They’ve been knocked down because they have legacy drugs that are seeing sales declines as their patents expire and they lose market share to generics. Any success in moving their new drug candidates toward approval by the Food and Drug Administration will lift their stocks, as investors anticipate higher earnings. The risk is that these new candidates don’t get approval. The key is to buy a basket of the cheap companies, so that gains in a few of them can offset disappointing performance in others.
The four stocks below trade at forward price/earnings multiples below the median of just under 13 times of the largest nine pharma companies, based on FactSet market-cap data.
Bristol Myers Squibb
(BMY), at $63, trades at just under eight times earnings. The market is concerned that its annual EPS of just over $8 will stagnate—or even decline—as the company sees billions of dollars of sales declines for several drugs due to expiring patents, which currently help comprise $46.6 billion in expected revenue this year. It has at least eight new drugs going through trial results, which could eventually produce over $30 billion in annual revenue, according to Jefferies analyst Akash Tewar, who has a top price target of $85, or 32% upside. Among the most promising: milvexian, a stroke prevention treatment.
“Robust new product cycles will drive P/E multiple expansion, given that the company trades at a significant discount to peers, and will result in share outperformance,” wrote William Blair analyst Matt Phipps, who rates the stock a Buy.
Pfizer
(PFE), at $36, trades at just under 11 times earnings. With Covid-19 waning, the company said its annual vaccine sales will be more than cut in half to just under $14 billion this year, out of a total $67.8 billion. Pfizer still has a pipeline of new drugs, such as a meningitis treatment, but it could also rejuvenate its vaccine business by combining a flu and Covid vaccine. More than 130 million Americans could get the vaccine by 2026, the company estimates, up from 79 million this year for the Covid vaccine alone.
Amgen
(AMGN), at $222, trades at just under 12 times earnings. Several of its drugs are set to see sales declines of a few billion dollars a year, even as the company tries to increase its $27 billion annual revenue stream. It has obesity drugs AMG133 and AMG786 in trial phases, in a market that could be above $30 billion annually. It has agreed to purchase
Horizon Therapeutics
(HZNP) for $27 billion, which would immediately add more than $5 to the company’s $18 in annual EPS. Though the Federal Trade Commission has sued to block the deal, Amgen would still be able to make other acquisitions or buy back more stock.
“We think a lot could go right with Amgen,” says Jason Ware, chief investment officer at Albion Financial Group, which owns the stock.
Gilead Sciences
(GILD), at $76, trades at just under 11 times earnings. It has numerous products in decline, but Trodelvy, a cancer treatment, is expected to grow from about $1 billion this year to $2.7 billion by 2028, according to FactSet, taking sales from below $27 billion this year to above $30 billion by 2028. EPS should gain about 6% annually to almost $9 by then.
Write to Jacob Sonenshine at [email protected]
Source: https://www.barrons.com/articles/4-big-pharma-stocks-on-sale-91f56f88?siteid=yhoof2&yptr=yahoo