There are sectors in the economy that go through an extended period of trending sideways to lower. A good example is the pharmaceutical sector. In the last 10 years, the S&P Pharmaceuticals Select Industry Index has delivered annualized total returns of 2.65%. Furthermore, the index has annualized total returns in the last five years of -2.63%, clearly indicating an extended bear market among pharma stocks.
Covid-19 did translate into buying action in selected pharma stocks. However, the interest was short-lived, as investors focused on the growth opportunities in the pandemic era. With pharma companies investing billions in research and development, the industry outlook is encouraging.
It’s likely that the industry will deliver dozens of blockbuster drugs through the decade for various medical conditions. Therefore, I believe that it’s a good time to discuss three undervalued pharma stocks to buy and hold for high returns.
Pfizer (PFE)
Pfizer (NYSE:PFE) is among the most undervalued pharma stocks to buy. PFE stock trades at a forward price-earnings ratio of 9.78 and offers an attractive dividend yield of 4.47%.
With the company’s Covid-19 vaccine sales boosting cash flows, Pfizer has embarked on a twin growth strategy. First, the company is targeting approximately $20 billion in incremental revenue by 2030 from new molecular entities. This seems likely considering that Pfizer has a deep research pipeline. For the current year, the company expects to deploy nearly $13 billion towards research and development.
Further, Pfizer is targeting incremental revenue of $25 billion by 2030 from new business deals. The company has already made a few acquisitions in the last 12 months. This will help diversify and broaden the product portfolio
With these efforts, I believe that PFE stock is attractive at current levels. I would not be surprised by a 70% to 100% rally in the next 24 months.
AstraZeneca (AZN)
AstraZeneca (NASDAQ:AZN) stock has been sideways in the last 12 months. Considering the company’s growth, a forward price-earnings ratio of 34.66 looks attractive. Further, AZN stock offers a dividend yield of 2.12%.
To put things into perspective, AstraZeneca reported earnings growth of 21% on a year-over-year (YOY) basis for the first half of 2023. Currently, the pipeline is robust with more than 120 ongoing late-stage clinical trials. This will ensure that a healthy earnings growth is sustained.
It’s also worth noting that the company has 30 potential Phase Three trials planned for the year. Of this, AstraZeneca believes that 10 drugs can be blockbuster opportunities. If this holds true, the outlook for the next few years is optimistic.
As of Q2, the company reported leverage of 1.9. Given the potential to generate robust cash flows, the company has high financial flexibility to invest in research and development.
Merck (MRK)
As compared to my first two picks, Merck (NYSE:MRK) stock has outperformed with returns of 19% in the last 12 months. I however believe that the stock remains attractively valued and is poised for further upside.
An attractive pipeline of drugs is an obvious reason to like Merck. Currently, the company has 80 programs in Phase Two, and 30 in Phase three, Further, 10 programs are under review. A core focus of the company in the foreseeable future is to expand the pipeline through strategic business development.
The acquisition of Prometheus Biosciences was completed in June. Prometheus’ expertise is in immunology. I believe that a few more big acquisitions might be on the cards in the next 12 to 24 months. This is a catalyst for sustained stock upside.
It’s worth noting that Merck reported YOY sales growth of 3% for Q2 2023. Given the pipeline and acquisitions, I expect growth to accelerate in the next few years.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
