Big money tends to flow from one sector to the other. During the pandemic, sectors like pharmaceutical and e-commerce were hot. This was followed by major buying interest in electric vehicles and other energy transition themes. When money flows out from one sector, it generally translates into undervaluation. This seems to be the case with pharmaceutical stocks.
During the covid-19 pandemic, the pharma sector witnessed big buying and valuations looked stretched. In the post pandemic world, the sector has been ignored. However, the pharmaceutical sector or the biotechnology sector bull story does not end with the pandemic. The lack of interest is a good opportunity to accumulate pharmaceutical stocks at a valuation gap for the next bull run.
As unfortunate as it might sound, adverse health conditions continue to increase globally. This necessitates investment in new drugs and a big market for major pharmaceutical companies. The focus of this column is on pharma companies with a deep R&D pipeline that’s likely to translate into growth in the coming years.
AstraZeneca (AZN)
AstraZeneca (NASDAQ:AZN) is my top pick among pharmaceutical stocks. Even as the sector remains ignored, AZN stock has traded largely sideways in the last 12 months. With a steady growth outlook, a forward price-earnings ratio of 17 looks attractive and AZN stock offers a dividend yield of 2.87%.
It’s worth noting that AstraZeneca has 178 projects in the pipeline. Of this, 17 new molecular entities are in the late-stage pipeline. With the Company expecting several blockbuster opportunities, the revenue growth outlook is robust.
AstraZeneca reported double-digit earnings growth for the last financial year. For 2024, AstraZeneca expects that it will “continue to deliver industry-leading growth.”
I must add that AstraZeneca is well diversified across therapy areas. This includes oncology, biopharmaceuticals, and rare diseases. At the same time, AstraZeneca is well diversified across geographies. For 2023, the Company’s growth in emerging markets (excluding China) was 35% on a year-on-year basis. Therefore, with multiple growth catalysts, AZN stock is poised for a meaningful rally.
Merck (MRK)
Merck (NYSE:MRK) is another blue-chip among pharmaceutical stocks to buy at a valuation gap. MRK stock has trended higher by 10% in the last 12 months, but trades at an attractive forward price-earnings ratio of 14.7. The stock also offers a dividend yield of 2.45%.
In terms of the pipeline, Merck has ten programs under review, 30 in the third phase and another 80 in the second phase. Therefore, there is strong visibility of new drugs being commercialized in the next few years. This will translate into healthy revenue and cash flow growth.
Last year, Merck clocked sales of $60.1 billion. The Company has guided for sales growth in the range of 4% to 7% for 2024. Earnings growth is also likely to be robust and I expect the positive momentum to sustain in the coming years. The Company’s pipeline is likely to create significant value in the oncology, cardiometabolic, and immunology business.
Pfizer (PFE)
Pfizer (NYSE:PFE) is among the worst impacted pharmaceutical stocks in the post-pandemic world. The sustained decline for PFE stock has been on the back of lower covid-19 vaccine revenue. At the same time, with several blockbuster drugs going off-patent in the coming years, there are concerns related to growth.
Pfizer is however addressing this challenge through organic investments and acquisition driven growth. As an example, Pfizer completed the acquisition of Seagen in December 2023. This will help the Company make significant inroads in the oncology segment.
Further, it’s worth mentioning that Pfizer has a clinical trials pipeline of 112 candidates. Of this, 31 candidates are in the third phase. This provides growth visibility.
Pfizer is targeting $20 million in incremental revenue from new molecular entities by 2030. The biopharmaceutical company also expects $25 billion in incremental revenue from new business developments by the end of the decade. This is likely to offset the negative impact of drugs going off-patent.
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.
