The dust is finally starting to settle on the third-quarter earnings season, which was particularly disappointing for the healthcare sector.
A Hillary Clinton tweet that put some Big Pharma stocks in her sights — plus the realization that the Affordable Care Act would only serve up one big revenue surge — sent a bunch of hospital and pharmaceutical stocks down to bargain-basement prices.
To forward-thinking investors, though, some of these names aren’t the ones to flee from in fear of more losses. Rather, they’re actually stocks to buy while they’re beaten down.
Here’s a look at five of the market’s Big Pharma names that are undervalued right now, as well as a couple more struggling pharmaceutical stocks that may actually be best left avoided at this time.
Big Pharma Stocks to Buy: Pfizer Inc. (PFE)
Yes, the Pfizer (PFE) acquisition of Allergan (AGN) has had more than its fair share of critics. Namely, some observers fear that making the Big Pharma company even bigger could simply make it so big that it’s unmanageable; Pfizer was mulling a breakup for that very reason even before making an overture for Allergan.
There’s no real downside to the pairing, however, even if the upside may be limited. The merger of the two pharmaceutical companies will generate an estimated $2 billion in synergies, plus hundreds of millions of dollars in tax savings every year.
In the meantime, the market already underestimates Pfizer, with or without a consummated deal with Allergan. The pullback since early August has left PFE shares at a palatable forward-looking price-to-earnings ratio south of 14, and once the dust settles on the Allergan deal, the company is still likely to split itself — and perhaps its tax benefit — all the same.
Big Pharma Stocks to Buy: Shire PLC (ADR) (SHPG)
Pfizer and Allergan are hardly the only Big Pharma stocks to enter the M&A arena of late. Shire PLC (SHPG) is also in the mix, having becoming the hunter after being the hunted last year before AbbVie (ABBV) ultimately dropped its bid to buy the Irish drugmaker.
The math of that particular pairing has a basic blessing from analysts. But, more importantly, SHPG has earned a spot on a list of pharmaceutical stocks to buy because it’s got a great pipeline.
It was admittedly a self-serving assessment, but earlier in the year, Shire CEO Flemming Ornskov may have been right when he said the company’s current pipeline was the strongest its ever been. Even the complete response letter from the FDA regarding the Opus-3 trial of lifitegrast as a treatment for dry-eye disease was largely taken in stride, and the company has already upped its guidance once this year on successful R&D and its accretive acquisitions.
Big Pharma Stocks to Buy: GlaxoSmithKline plc (ADR) (GSK)
GlaxoSmithKline plc (GSK) is another one of a handful of worthy pharmaceutical stocks to buy, but not because it’s a buyout target that could make for a compelling tax-inversion play.
Rather, GSK is a Big Pharma stock worth owning for an old-fashioned reason: It just has a lot going for it, particularly within its current portfolio.
That’s a premise not everyone will agree with; GlaxoSmithKline has been something of a punching bag since mid-2014, when GSK started a 25% tumble that’s still going pretty strong. What has changed in the meantime to thwart that pullback? News that Glaxo could request approvals for up to 20 new drugs by the year 2020, then file 20 more new drug applications by 2025 … 80% of which would be first-in-class therapies.
Not all of them will be approved of course, nor will all of them even make it to the end of phase 3 trials. Enough of them will, however.
In the meantime, GlaxoSmithKline shares have the potential to move higher in anticipation of those near-term approvals, as those drugs’ value and potential become clearer.
Big Pharma Stocks to Buy: Bristol-Myers Squibb Co (BMY)
With a trailing P/E of 63 and a forward-looking P/E of 29, Bristol-Myers Squibb (BMY) isn’t topping a lot of investors’ lists of Big Pharma buys.
But don’t let the past or the foreseeable future’s reality fool you. Bristol-Myers Squibb arguably has one of the most underestimated pipelines among all the Big Pharma names. And what Bristol-Myers Squibb doesn’t have in the pipeline, it’s not shy about buying.
For example, in early November, Bristol-Myers Squibb acquired a company called Cardioxyl Pharmaceuticals to add its cardio drug CXL-1427 to the pipeline, beefing up the suitor’s presence in the heart-care market. Earlier in the year, the company acquired Flexus Biosciences for a cool $1.25 billion to broaden its cancer portfolio. Flexus was working on a novel immunotherapy that had yet to enter clinical trials; that’s a testament to its potential.
As for the existing pipeline and portfolio, Opdivo has already made a splash, and is just getting started. Bristol-Myers’ Opdivo has already been approved as a treatment for lung cancer, for melanoma and for kidney cancer. With more trials of the drug underway, though, in addition to the sales growth it will see as a therapy for its approved uses, analysts think annual peak sales of Opdivo could exceed $5 billion … versus nothing last year.
Big Pharma Stocks to Buy: Merck & Co., Inc. (MRK)
Merck (MRK) might not have any grand slams left in its pipeline or portfolio, but it’s quietly got more doubles, triples — and maybe even a couple of solo shots — than the market may be giving it credit for.
Case in point: Keytruda. Kudos to Merck for coming up with something entirely new. Keytruda is an anti-PD1 (programmed death) therapy … the first drug of its type that turns a patient’s immune system back “on” so it fights certain form of cancers. Keytruda was first approved to treat melanoma, and more recently it was approved as a therapy for non-small cell lung cancer.
In the meantime, Merck has readied another drug as a treatment for hepatitis C; six trials of Elbasvir/Grazoprevir are underway that are in phase 2 or phase 3. Leerink analyst Seamus Fernandez thinks the strength of this piece of the pipeline could secure the number-two spot for Merck in the HCV race.
Big Pharma Duds: AstraZeneca plc (ADR) (AZN)
You have to give credit where it’s due. AstraZeneca plc (AZN) CEO Pascal Soriot gave it the proverbial “old college try” when he took the helm in 2012. His mission of turning the ship around for a company that many would argue had the weakest research and development units among all Big Pharma companies was a big one.
But neither the pipeline nor the portfolio are significantly stronger in the meantime despite a string of smaller deals, and there’s not a lot on the horizon to get excited about.
Don’t misunderstand. AstraZeneca has been making forward progress. Baby steps aren’t enough to climb out of the deep hole AZN was and still is in.
The one possible exception is a compelling oncology effort. Lynparza was approved as a therapy for ovarian cancer late last year, and AZD9291 has shown promise as a treatment for non-small-cell lung cancer through phase 2 trials. It’s just not enough.
Sadly, the biggest value AstraZeneca offered to shareholders was as a acquisition candidate … but its most likely suitor was Pfizer in 2014. AZN rejected all of Pfizer’s bids, and subsequently sent a message to any other suitor that it was only interested in offers the company knew it wouldn’t be getting.
Now with a looming overhaul to the U.S. tax code that will likely quell so-called tax inversions, AZN isn’t even a good buyout candidate.
Big Pharma Duds: Eli Lilly and Co (LLY)
Yes, Eli Lilly (LLY) won the FDA’s approval for its cancer drug Portrazza (necitumumab) as a therapy for lung cancer. Don’t let one approval speak for the company’ entire pipeline, however. Remember, it was less than two months ago Eli Lilly bagged its much-ballyhooed cholesterol drug, evacetrapib, after it failed to do as well as hoped in phase 3 trials.
Point being, Eli Lilly isn’t exactly firing on all cylinders when it comes to its pipeline.
Yet, it’s acquiring new drugs now. For instance, In October it acquired a phase 3 intranasal glucagon from Locemia Solutions, and it acquired Novartis’ (NVS) animal health unit in April. That’s a new strategy, though, and a boat that Eli Lilly may have missed if it’s just getting into the game. Remember, as of the beginning of the year it wasn’t something LLY had a great deal of interest in. It’s well behind other Big Pharma suitors in the buyout race.
Besides, neither of those acquisitions suggest big-enough thinking to be a much-needed game-changer for struggling LLY.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.