The outlook for pharmaceutical stocks has been mixed in the last five years. During the pandemic, the early-movers in the vaccine race gained as compared to others. However, sentiments turned significantly negative for the pharmaceutical sector in a post-covid world. I believe that pharmaceutical stocks are poised for a strong comeback in the next 12 to 24 months.

There are two major reasons for this view. First, the world faces macroeconomic and geopolitical headwinds. It’s likely that the markets will be volatile and there will be phases of sharp corrections. I therefore expect portfolio readjustments to low-beta stocks and pharmaceutical names are likely to benefit.

Further, some of the major pharmaceutical companies have focused on building a deep clinical pipeline. Through organic and acquisition driven initiatives, some of the best pharma stocks seem poised for growth. It’s therefore likely that pharmaceutical stocks will trend higher from attractive valuations.

Let’s therefore discuss three pharmaceutical stocks that are likely to trend higher even if the broad markets remain depressed.

Pfizer (PFE)

After a sharp correction last year, Pfizer (NYSE:PFE) stock has remained sideways for YTD. This is an early indication of the stock bottoming out. At a forward P/E of 10.8, PFE stock looks undervalued and offers a dividend yield of 5.88%.

From the perspective of product pipeline, Pfizer reported 33 phase three and 27 phase two candidates. Overall, the pipeline was at 113 programs as of June. With more than $10 billion in annual research and development spending, the pipeline is likely to translate into revenue growth in the next few years.

It’s also worth noting that for Q2 2024, Pfizer reported healthy numbers. Revenue was at $13.3 billion, which was higher by 3% on a year-over-year basis. The company’s oncology revenue increased by 27% and is likely to be the key growth driver for the next few years.

Further, with the commencement of the first phase of the “manufacturing optimization program,” the company is “setting the foundation for future margin expansion.” Given these factors, PFE stock seems undervalued and poised for a strong reversal rally.

AstraZeneca (AZN)

AstraZeneca (NASDAQ:AZN) stock has been in an uptrend with returns of 22% for YTD. However, considering the expected earnings growth, AZN stock remains attractively valued. Fresh exposure can be considered at current levels.

It’s worth noting that AstraZeneca has 189 projects in the pipeline. Of this, 20 new molecular entities are in the late-stage pipeline. This underscores my view that the pharma company is positioned for healthy growth in the coming years.

For the first half of 2024, AstraZeneca reported revenue growth of 18% YOY to $25.6 billion. An important point to note is that growth was diversified across therapy areas and geographies.

While emerging markets growth was 22%, excluding China, revenue growth was 29% on a YOY basis. Strong geographic diversification and a broad product portfolio are the key strengths for AstraZeneca.

For the current year, the company has guided for mid-teens percentage increase in earnings per share. The growth rate will likely maintain and a forward P/E of 20.3 therefore looks attractive.

Merck (MRK)

Merck (NYSE:MRK) is another undervalued name among pharmaceutical stocks. In the last 12 months, MRK stock has remained sideways and trades at a forward P/E of 13.9. Business developments have, however, been positive and the stock also offers a healthy dividend yield of 2.69%.

In a recent development, Merck announced the acquisition of “CN201, a novel investigational clinical-stage bispecific antibody for the treatment of B-cell associated diseases.” The acquisition is for a consideration of $700 million. The company is therefore expanding an already attractive pipeline and with 30 programs in the third phase, the growth outlook is robust.

For Q2 2024, Merck reported sales of $16.1 billion, which was higher by 7% on a YOY basis. Between 2024 and 2028, Merck has guided for capital investment of $16 billion. This includes expanding manufacturing capacity for oncology, vaccines, and animal health. Expansion in manufacturing coupled with a deep product pipeline sets stage for healthy growth through this period.

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.

On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.