Pharma stocks have taken on a new allure since the onset of the pandemic. The early stages of the health crisis were characterized by a race to ensure that pharma majors were not laggards in vaccine development. There have been few clear winners and these drug makers have witnessed strong revenue and cash flow upside.
With expectations that the pandemic might evolve to an endemic in 2022, there has been some correction in pharma stocks. This has created a good opportunity to accumulate some quality names for the long-term portfolio.
It’s worth noting that the pharmaceutical sector is pretty much immune to economic shocks and has low-beta stocks. This adds to the stability in the portfolio. With the current volatility in the markets, investors can consider going overweight on pharma stocks.
More importantly, pharma companies that have witnessed a strong growth in cash buffer from Covid-19 vaccine sales are positioned to benefit. The cash buffer is being utilized for deepening the product pipeline and pursuing acquisition driven growth.
So, let’s talk about four pharma stocks that look attractive at current levels, specifically:
Pharma Stocks to Buy Even if the Pandemic Ends: Pfizer (PFE)
Pfizer has been a major beneficiary in terms of revenue and cash flow upside from the Covid-19 vaccine. PFE stock has also been trending higher with returns of 40% in the last 12-months. Additionally, the stock comes with an attractive dividend yield of 3.3% and a low-beta.
Even if the pandemic shifts to an endemic, PFE stock is among the top pharma stocks to hold in the portfolio. The first reason is the company’s product pipeline. As of February 2022, Pfizer reported 25 phase two and 27 phase three candidates. Overall, the company has a product pipeline of 89 candidates across various phases of clinical trials. As these drug candidates hit the markets, there is visibility for revenue upside.
Another reason to like Pfizer is the robust improvement in financial flexibility. For 2021, Pfizer’s revenue from Covid-19 vaccine was $36 billion. Considering the order backlog as of Q3 2021, Pfizer has revenue visibility from the vaccine of $29 billion for 2022. This translates into strong cash flow visibility.
As a matter of fact, Pfizer has pursued acquisition driven growth to its product pipeline in the last two quarters. This is likely to sustain and will boost the growth outlook. At the same time, higher financial flexibility will translate into accelerated development in the product pipeline. Considering these factors, PFE stock looks attractive at a forward price-to-earnings-ratio of 6.9.
AstraZeneca stock returns have been relatively muted in the last 12-months. However, AZN stock looks attractive considering the earnings growth and dividend upside potential in the next few years.
AstraZeneca has also been a beneficiary of revenue and cash flow growth coming from its Covid-19 vaccine. For 2021, the company reported revenue growth of 38% to $37.4 billion. Excluding the impact of its Covid-19 vaccine, revenue growth was 23%.
It’s worth noting that AZN stock trades at a forward P/E of 18.1. However, for 2021, core EPS growth was 37%. Even if EPS growth decelerates beyond 2022 on a relative basis, AZN stock is undervalued. For the current year, the company expects higher revenue and EPS growth as compared to 2021.
As for its pipeline, AstraZeneca currently has 177 projects in various phases of clinical trials. With a meaningful pipeline of Phase two and three projects, there is visibility for sustain growth. Through 2025, AstraZeneca has guided for double-digit revenue growth.
From a financial perspective, AstraZeneca reported net-debt of $24.3 billion as of December 2021. However, the net-debt-to-EBITDA is low at 3.2. With strong EBITDA and cash flows, the company still commands an investment grade balance sheet. AstraZeneca has also guided for annual dividend increase of 10 cents.
Overall, factors of a healthy product pipeline, diversified geographical presence and financial flexibility makes AZN stock attractive and a “sound long-term bet,” according to Barron’s.
Pharma Stocks to Buy Even if the Pandemic Ends: Novavax (NVAX)
NVAX stock has been a massive under-performer with the stock having declined by almost 70% in the last 12-months. This does not come as a surprise with Novavax being a laggard in the Covid-19 vaccine race.
However, there are two factors that make NVAX stock attractive after a sharp correction.
First, Novavax has shifted focus to delivering Covid-19 vaccine to low-income countries. Vaccination rates in these countries are still low. Examples include India and Indonesia. The company estimates that the total dose demand for middle to low-income countries is 6.8 billion doses.
Further, Novavax has already committed two billion doses and has that manufacturing capability for 2022. As these doses are delivered, there is scope for revenue and cash flow upside.
It’s also worth noting that the company has a cash buffer of $1.9 billion. The company intends to use the buffer to accelerate the vaccine pipeline and pursue strategic mergers and acquisitions.
Novavax has also initiated trials for a combination vaccine for flu and covid-19. If the trials deliver positive returns, the possible vaccine can be a long-term cash flow provider. Besides its Covid and NanoFlu candidates, the company is also pursuing trials for combination vaccine for covid and RSV.
I therefore believe that NVAX stock might have bottomed out. The company’s CEO is also expecting Covid-19 vaccine approval in the United States within weeks. Vaccine deliveries through 2022 will be a catalyst for stock upside. As cash flows swell further, there will be scope for deepening the product pipeline.
Moderna has been the biggest value creator among pharma stocks during the pandemic. From levels of around $20 at the beginning of 2020, MRNA stock had surged to highs of $497.
There has been a sharp correction as the markets look for catalysts beyond the Covid-19 vaccine. At current levels of $135, the stock looks worth considering.
Moderna is already expanding its product pipeline to ensure long-term revenue visibility. Recently, the company announced three new vaccine development programs. These are potential vaccines against Herpes simplex virus, varicella-zoster virus and checkpoint cancer vaccine.
With these, the company has 37 development programs. Of course, most of the development program is still at an early stage. However, the covid-19 vaccine will continue to be a source of revenue and cash flows in the medium-term.
The pharma company is also looking at building a stronger geographical presence. Moderna recently announced expansion in the Asia-Pacific region. Further, the company is building commercial footprint in six additional European countries for delivery of mRNA vaccines and therapeutics.
It’s also worth noting that Moderna reported cash and investments of $15 billion as of Q3 2021. This gives the company ample financial flexibility to pursue aggressive investment in research and development.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.