If you want to get good value when investing in big pharma companies, it’s necessary to look at quality companies that are struggling. Given the industry’s long product development times, with most drugs taking seven years or more to reach the market after entering clinical trials, periods of uncertainty could potentially last a long time.
But good things often come to those who can wait. With that in mind, let’s take a look at two pharmaceutical stocks that are incredibly cheap and worth buying right now, assuming you’re willing to patiently let their long-term strategic plans unfold over the next few years.
1. Pfizer
Pfizer (NYSE:PFE) is a pharmaceutical stock that needs no introduction – or perhaps it’s more accurate to say it didn’t need an introduction during the recent boom times of coronavirus vaccine and antiviral sales, which are over.
In 2022, it generated more than $100 billion in revenue from sales of those anti-coronavirus drugs. Today, Pfizer appears to be struggling, even though its extensive pipeline with 33 late-stage clinical programs, recent major acquisitions and ambitious expansion plans through 2030 are potentially powerful drivers of future growth. The total return of its shares has fallen 20% over the past three years. Last year it had several quarters in which it reported operating losses instead of profits, while revenue over the last 12 months fell to $55 billion.
There are a number of valuation factors that support the idea that Pfizer stock is undervalued, starting with its price-to-sales (P/S) ratio of 3. The price-to-free cash flow (P/FCF ) ratio is 34, which compares favorably with other major pharmaceutical players such as Novo Nordisk which are starting to look a bit frothy, with P/FCF multiples near 55.
Better days lie ahead for Pfizer, which supports the idea of buying its shares at the current valuation.
It is implementing a campaign to reduce production costs to save as much as $1.5 billion in costs by early 2028, on top of another initiative that aims to cut costs by $4 billion by the end of this year. Management indicates that in the near future it will accelerate both reinvestment in internal research and development (R&D) activities and the return of capital to shareholders.
And that will likely happen around the same time as its newly acquired oncology drug division takes off and starts to drive growth, which could be a powerful cocktail for the value of its stock, to say the least.
2. Merck
Just like Pfizer, Merck (NYSE:MRK) has had a few unprofitable quarters on an operating basis lately, although it also has more than 30 programs in Phase 3 clinical trials, at least some of which will bring in more revenue in the coming years.
More important than the recent hiccups, however, is the looming patent expiration of its blockbuster cancer drug Keytruda, which expires in 2028. Keytruda sales generated more than $7 billion of the drug company’s total revenue of about $16 billion in the second quarter. , so it is an important pillar that supports the top line. While there are a handful of programs aimed at expanding the drug’s approved indications, which will likely keep profits growing for a long time, the uncertainty over how Merck will continue to grow rather than just tread water after generic pharmaceuticals stole its market share with Keytruda is undoubtedly a factor keeping its valuation low.
Merck’s P/S multiple is roughly 4, and its P/FCF is 21. That makes its valuation slightly more expensive than Pfizer’s per dollar of sales, but significantly cheaper per dollar of free cash flow. In other words, it’s cheap, but not so cheap that you’d find it neglected in the bargain bin.
Investing in R&D remains the top priority for the company’s capital allocation, followed by capital expenditures and dividends paid. Share buybacks are at the bottom of the priority list, which could be another reason why many investors are avoiding the stock despite its low valuation. Still, it doesn’t make sense for investors to bet on the continued production of Merck’s pipeline when management explicitly says its dollars will continue to accelerate its R&D activities rather than curtail them.
The only reason I think the market is playing it safe is because there isn’t yet a clear long-term revenue stream that will replace Keytruda. However, with a solid investment in R&D, I also believe that Merck is perfectly positioned to eventually bring multiple drug candidates to market that will not only replace the existing drug portfolio, but also far exceed expectations.
The company is also spending heavily to acquire promising programs from biotech companies. On October 1, it closed a $750 million deal to acquire an early clinical-stage asset that would address both relapsed or refractory non-Hodgkin’s lymphoma (NHL) and relapsed or refractory B-cell acute lymphocytic leukemia (ALL). can treat. . And with more than $11 billion in cash, equivalents and short-term investments on hand, it has plenty of dry powder to look for promising growth opportunities.
So take advantage of this stock’s price while it’s still cheap, because it probably won’t be nearly as cheap for a while.
Should you invest €1,000 in Pfizer now?
Consider the following before buying shares in Pfizer:
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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has and recommends positions in Merck and Pfizer. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.
2 Incredibly Cheap Big Pharma Stocks to Buy Now was originally published by The Motley Fool
