In the last year, pharmaceutical stocks, in general, have taken a back seat to coronavirus vaccine makers. Seemingly, unless it was tackling Covid-19, a drug maker was viewed by stock market traders as dull.
When the market prices future earnings, they bid up shares of BioNTech (NASDAQ:BNTX) and Moderna (NASDAQ:MRNA). Those stocks rose by two-fold and six-fold, respectively. And even though shares dipped in recent months, mega market capitalization pharmaceutical stocks are lagging.
That may be a mistake. Investors armed with the knowledge of drug companies having a compelling pipeline will get rewarded. Markets, as impatient as they are, will assign little short-term value to those having a deep pipeline of drugs in clinical studies. But as those studies progress, a positive data read will bring the drug closer to market. Before you know it, the company has a blockbuster drug on the market while the stock languishes.
There are seven pharmaceutical stocks that investors should consider:
- AbbVie (NYSE:ABBV)
- AstraZeneca (NASDAQ:AZN)
- Bristol-Myers Squibb (NYSE:BMY)
- Gilead Sciences (NASDAQ:GILD)
- Merck & Co (NYSE:MRK)
- Pfizer (NYSE:PFE)
- Viatris (NASDAQ:VTRS)
Taken from Stock Rover, notice the strong quality and growth scores for those picks. Also, the free cash flow per share exceeds the dividend per share, in most cases. This suggests that for those paying a dividend, investors get a steady stream of long-term income:
|Company||Quality Score||Growth Score||Free Cash Flow/Share||Dividend/Share|
|Merck & Co||97||93||$2.65||$2.60|
Pharmaceutical Stocks: AbbVie (ABBV)
When AbbVie acquired Allergan, it took on additional debt which weighed on its balance sheet. ABBV stock fell to below the $80 range as investors questioned management’s wisdom. In time, the acquisition will prove accretive to revenue.
AbbVie positioned itself for sustainable growth by building strong leadership in four areas: immunology, hematologic oncology, neuroscience, and Allergan aesthetics. The pandemic may have slowed demand for botox and botox cosmetics. When the crisis ends, look for sales in this segment to rebound.
The company forecast a robust pipeline of new therapies driving its revenue growth in 2024. So, when Humira loses its exclusivity in 2023, AbbVie expects an overall sales decline in 2023 first. This will snap back, thanks to new products.
Growth will accelerate in 2025. Given that guidance, investors may build this five-year discounted cash flow revenue exit model.
|(USD in millions)||Input Projections|
|Fiscal Years Ending||19-Dec||20-Dec||21-Dec||22-Dec||23-Dec||24-Dec|
|% of Revenue||47.20%||49.80%||51.70%||53.00%||50.00%||50.00%|
This model uses a Revenue Exit multiple to calculate Terminal Value after five years.
|Discount Rate||7.5% – 6.5%||7.00%|
|Terminal Revenue Multiple||5.3x – 6.3x||5.8x|
|Fair Value||$100.78 – $126.11||$113.23|
Using the assumptions above, ABBV stock is worth around $113.
AbbVie is banking on Rinvoq and Skyrizi offsetting the revenue loss from Humira. For the long-term investor, the sales peak for the two products will not happen until early 2030.
AstraZeneca’s Covid-19 vaccine is a near-term growth catalyst. It also has a few products that won approval from the Food and Drug Administration. On Jan. 15, the FDA approved AstraZeneca and Daiichi’s antibody-drug conjugate, Enhertu. This drug treats adult patients with locally advanced or metastatic HER2-positive gastric or gastroesophageal (GEJ) adenocarcinoma.
The European Union and the U.K. approved AZN’s dosing option for Imfinzi. The drug, which treats unresectable (inoperable) non-small cell lung cancer, would reduce a patient’s medical visits.
Earlier this year, India approved the emergency use of AZN’s Covid-19 vaccine. The country plans to administer the vaccine across the country. India has a population of 1.3 billion.
On Wall Street, the average price target on AZN stock is $67.50 (per Tipranks). On a five-year discounted cash flow EBITDA exit model, a discount rate of 7% would imply a fair value of nearly $55:
|Discount Rate||7.5% – 6.0%||7.00%|
|Terminal EBITDA Multiple||15.0x – 18.0x||15.8x|
|Fair Value||$51.30 – $63.47||$54.66|
Readers may click on the embedded link above to change the assumptions. Forecasting a higher annual revenue and decreasing the discount rate would raise the fair value.
Bristol-Myers Squibb (BMY)
When Bristol-Myers bought out Celgene, it issued a contingent value rights (CVR) agreement. This all-or-nothing payout is worth $6.4 billion. Celgene shareholders would get $9 a share if Celgene received approval for three of its drugs. Because the FDA did not decide on liso-cel, BMY terminated the CVR.
Saving $6.4 billion is a positive development for the company, preserving precious cash that BMY may use to further its research and development efforts. It would also compensate the firm for the ongoing product development delays by Celgene. As of Nov. 17, 2020, Bristol-Myers said it had over 50 compounds in development and over 40 disease areas being studied. Opdivo, which is in the research area of solid tumors, is well into Phase 2. The medication, which treats certain types of cancer, reached a primary endpoint last August. Unfortunately, the firm withdrew its application for treating small cell lung cancer.
Opdivo works as adjuvant therapy. For example, the CheckMate-577 trial studied the drug for treating resected oesophageal or gastroesophageal junction cancer (GEJ).
Gilead Sciences (GILD)
Investors largely ignored the revenue potential from coronavirus antiviral drugs. Veklury (remdesivir) has mixed clinical and practical data supporting its efficacy in treating coronavirus patients. So, shareholders cannot wonder why Gilead Sciences excluded sales of the drug in its updated 2020 guidance on Jan. 11.
The company forecast product sales of $21.5 billion – $21.525 billion excluding Veklury. With $2.8 billion from the antiviral, it still represents almost 10% of total sales. Gilead is looking at its mid-to-long-term growth potential. It expects Biktarvy sales driving sales for the full year 2020. Truvada will weaken results, as it loses exclusivity in the U.S.
Gilead plans to boost its research and development spending from the mid-teens percentage growth set on Oct. 28, 2020, to around 20% growth.
The newest contributor to its pipeline is its acquisition of Immunomedics. This cost the company around $21 billion. Chairman and CEO Daniel O’Day said “we will bring Trodelvy to many more patients around the world with triple-negative breast cancer and continue to explore its potential in many other types of cancer, both as a monotherapy and in combination with other treatments.”
As the leader in antibody-drug conjugate technology, the Immunomedics unit is a potential growth driver for Gilead in the years ahead.
On Wall Street, 26 analysts rating GILD stock have a median 12-month price target of $73, with a low of $58 a share and a high of $100 (according to CNN Business).
Merck & Co (MRK)
Merck believes the market is underestimating its revenue growth prospects between now and 2024. As Keytruda loses its exclusivity, the company needs its pipeline of drugs in development to come to market.
CFO Ken Frazier said that Merck is focusing on oncology drugs. He highlighted the company’s completing 120 business development transactions. Spinning off its women’s health and renaming the unit Organon & Co. will deepen the company’s focus on its core strengths. So, not only will Organon grow on its own, the parent company will depend on sales of Gardasil, a vaccine for human papillomavirus. Pneumovax 23 is pneumococcal vaccination that fared well in the last year despite the Covid-19 pandemic.
The company has a rich pipeline with over 25 mechanisms in the clinic. This year, investors should watch for its developments in LAG-3 and CTLA4. Those are targets of immunotherapy in treating gynecologic cancers.
Based on its future cash flow, simplywall.st has a $144 fair value target on MRK stock.
Pfizer gets in the news very often because of its partnership with BioNTech and the coronavirus mRNA vaccine. Despite its lackluster performance, the drug manufacturing giant has a long-term sales target of at least 6% revenue growth compounded annually through 2025.
When JPMorgan analyst Chris Schott asked Merck about its growth target at the firm’s virtual Healthcare Conference held on Jan. 14, chairman and CEO Albert Bourla confirmed it. Excluding Covid-19 vaccine sales, Pfizer has several product growth drivers ahead.
For instance, in its JAK pipeline, abrocitinib is an inhibitor that will treat patients with atopic dermatitis. This product will, of course, compete against Regeneron’s (NASDAQ:REGN) Dupixent drug. There are 60 million patients worldwide who could use that drug. That total addressable market is large and yet PFE stock trades at a discount.
Income investors should warm to PFE stock over holding BNTX; shares of the former pay a dividend that currently yields more than 4%.
Viatris, which is formed by the spinoff of Pfizer’s Upjohn unit and Mylan, slumped in the last week. The company issued an unexpectedly weak outlook.
At last month’s JPMorgan conference, the company qualified 2021 as a trough. It projected flat revenue growth in the near-term. Impatient market participants dumped VTRS stock that day. The generics giant has several catalysts ahead, including plans to pay a dividend later this year.
In the next several years, Viatris will reduce its debt by over $4 billion. In the near-term, the company will invest to build its pipeline. It will get there by increasing its merger and acquisitions. This is a risky path, as the company could overpay for companies and get nothing in return. Still, positive cash flow from the slimmed-down, merged firm will give Viatris many options.
If it fixes its growth problems in China and Japan, then a rebound in international revenue will allow it to support its generic drug launches.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.