With a few exceptions, pharmaceutical stocks have underperformed the broader market this year.
The S&P Pharmaceutical Index is down 3% year to date versus a 12% gain in the benchmark S&P 500. Several reasons account for the underperformance, ranging from a focus on technology stocks to the patent expirations for several blockbuster drugs. One such case is Humira, used to treat arthritis and other conditions.
However, pharmaceutical stocks can be expected to eventually rebound. The good news for investors is that many pharma stocks are on sale right now and can be purchased at rock bottom prices.
Let’s examine three well-positioned stocks that are expected to have a Q4 comeback.
Eli Lilly (LLY)
First up, the hands-down winner among pharmaceutical stocks this year is Eli Lilly (NYSE:LLY).
So far in 2023, the company’s share price has increased 47%, bringing the stock’s five year gain to 367%. LLY stock has literally outpaced every other pharma security on the market. And, the reason is due to its weight loss drug Mounjaro. The medicine has shown remarkable results in clinical trials and is expected to be approved by the U.S. Food and Drug Administration (FDA) within months. Already, demand for the weight loss treatment is sky high.
Doctors are prescribing Mounjaro, which was initially developed as a treatment for type 2 diabetes, off label as a weight management drug. Eli Lilly continues to ramp up production as it awaits an FDA green light. Once that happens, the company will begin shipping Mounjaro worldwide in expectation of blockbuster sales. Analysts conservatively put Mounjaro’s annual sales at more than an astounding $50 billion. Further, some have even predicted that the weight loss drug could become the highest selling medication of all time.
Despite the big rally in LLY stock, analysts forecast more gains ahead. The median price target on the company’s shares is currently $600, 12% higher than the current trading price.
Pfizer (PFE)
To buy on the dip, consider Pfizer (NYSE:PFE) right now.
Optics show the leading drug maker’s share price is currently inexpensive, having fallen 35% year to date (YTD), trading only eight times future earnings. Also, PFE offers a quarterly dividend of 41 cents a share, giving it a yield of nearly 5% based on the current share price. Declining sales of its Covid-19 vaccine knocked the stock lower this year. The sales are expected to be nearly 70% compared to 2022.
However, let’s look at the seemingly bright side.
First, Pfizer is coming off record revenues that reached $100 billion in 2022, boosting its cash position. Next, the pharmaceutical company recently attained FDA clearance for their new Covid-19 booster. It’s a timely welcome as the winter is approaching, the season when infection rates are expected to spike.
Also, Pfizer received approval this spring for its oral Covid-19 treatment that comes in the form of a pill called Paxlovid. The company recently reported that about 250,000 courses of Paxlovid are being shipped per week as cold and flu season begins.
Lastly, Pfizer is not a one trick pony. The company creates other commercially available medications, such as the bestsellers of Ibrance and Eliquis. The median price target on PFE stock is 22% higher than current levels.
Bristol Myers Squibb (BMY)
Lastly, pharmaceutical giant Bristol Myers Squibb (NYSE:BMY) looks cheap right now but has long-term earnings potential. YTD, BMY stock has declined 20%.
While not as undervalued as Pfizer, Bristol Myers Squibb’s share price certainly looks affordable, trading at 15 times forward earnings. It too pays a strong quarterly dividend of 57 cents per share, giving it a yield of nearly 4%. The downturn in the stock has been due to patent expiries. The company is facing the expiration of patents on multiple drugs that comprise nearly $50 billion in annual sales.
While the patent expirations are no doubt concerning, Bristol Myers Squibb currently has at least eight new drugs working their way through clinical trials. Combined, this could generate over $30 billion in annual revenue for the company. For example, their Milvexian, which is used to prevent strokes, is expected to produce blockbuster sales. Several analysts, including those at Jefferies Financial Group (NYSE:JEF), rate BMY stock a “buy.” The median price target on the shares is 28% higher than current levels.
On the date of publication, Joel Baglole held a long position in LLY. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
