No major pharmaceutical stocks have dominated the sector as much as this one in recent years Eli Lilly(NYSE: LLY) And Pfizer(NYSE:PFE).
When the COVID-19 pandemic broke out in 2020, Pfizer quickly emerged as the leader in the race to develop a vaccine. It ultimately generated billions of dollars in sales for the first approved COVID-19 vaccine. Pfizer also made a fortune with its oral COVID-19 therapy, Paxlovid.
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Eli Lilly is now the largest drugmaker in the world by market capitalization. The remarkable increase is largely due to the success of the anti-diabetic and anti-obesity drugs Mounjaro and Zepbound.
But in recent weeks the good times have passed for both stocks. Lilly shares are down nearly 25% from their peak a few months ago. Pfizer is down about 20%. Is it time to sell Lilly and Pfizer shares?
Much of Lilly’s recent dismal stock performance stems from its Oct. 30 third-quarter update. The company’s third-quarter revenue and profit fell short of Wall Street consensus estimates. Lilly also significantly lowered its earnings guidance and the top end of its full-year revenue expectations.
That wasn’t the only bad news for Lilly. On November 14, the drugmaker announced it was filing a lawsuit against the Health Resources and Services Administration (HRSA), an agency of the U.S. Department of Health and Human Services (HHS). HRSA rejected Lilly’s cash replenishment model for reimbursing entities covered by the 340B Drug Pricing Program. This federal program provides prescription medications at reduced costs to eligible health care organizations that serve vulnerable populations, including low-income and uninsured patients.
Pfizer has also had its fair share of setbacks in recent months. On September 25, the company announced that it was voluntarily withdrawing sickle cell disease treatment Oxbryta from all markets due to safety concerns. In August, Pfizer and its partner, BioNTechreported disappointing results from a phase 3 trial evaluating their combination COVID-flu vaccine.
Some investors are also undoubtedly concerned about the regulatory landscape for Lilly and Pfizer in the coming years. The proposed nominee to lead HHS in the next presidential administration has criticized obesity drugs and vaccines, including COVID-19 vaccines.
Lilly and Pfizer certainly share some common characteristics. However, the dynamics of the two drug makers are quite different.
For example, the valuations of these pharmaceutical stocks are polar opposites. Lilly’s stock trades at 32 times forward earnings. Meanwhile, Pfizer’s profit margin is just 8.3.
This stark contrast stems from the growth prospects of the companies. Analysts expect Lilly’s sales to skyrocket over the next decade as Mounjaro and Zepbound, along with other products including Alzheimer’s disease drug Kisunla, gain popularity. Meanwhile, Pfizer will lose patent exclusivity on several top-selling drugs in the coming years.
The context of the recent share price declines of these two drug companies is also very different. Although Lilly’s stock price has fallen more sharply in recent weeks, the stock had more than tripled over the past three years before the selloff. However, Pfizer’s recent decline follows its share price falling more than 40% over the past three years.
I don’t know if Lilly and Pfizer stock will recover anytime soon. However, I don’t think it’s time to sell either pharmaceutical stock, at least not if you’re a long-term investor.
Lilly’s disappointing third-quarter sales and profits were related to wholesalers temporarily reducing their stocks of Mounjaro and Zepbound. The reduction in full-year guidance was mainly due to costs incurred in the acquisition of Morphic Holding. I wouldn’t worry about either issue.
Neither Pfizer’s withdrawal of Oxbryta nor the setback to its combo COVID flu vaccine are showstoppers. While the drugmaker faces a patent cliff, it also has new growth drivers that should offset expected revenue declines from the loss of exclusivity.
In my opinion, investors should not put the cart before the horse when it comes to possible changes at the federal level. Lilly and Pfizer have successfully weathered both easy and tough times for the pharmaceutical industry in the past. I expect they will both continue to do this in the future.
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Keith Speights has positions in Pfizer. The Motley Fool holds and recommends positions in Pfizer. The Motley Fool recommends BioNTech Se. The Motley Fool has a disclosure policy.
Is it time to sell Eli Lilly and Pfizer stock? was originally published by The Motley Fool
