Huge sales. Steady dividends. Recession-resistant businesses. Those are just a few of the reasons why many investors like to buy shares of big pharmaceutical companies.
A perfect contrarian play
Zhiyuan Sun (Bayer): Investing guru Warren Buffett once said, “When there’s blood in the streets, you buy.” The quote could not be more applicable to shares of Bayer.
Recently, the company lost its third round of appealing a jury verdict that found Roundup, a weed killer produced by its Monsanto subsidiary, causes cancer. Bayer will be pulling the current version of Roundup off U.S. shelves by 2023, in addition to opening itself to potentially billions of dollars in liability settlements.
But it’s clear that outcome has been baked into the share price and then some. Currently, Bayer stock is trading at a mere 1.1 times revenue and 7.3 times earnings. That is a bargain compared to the average pharma stock, which sells for 4.9 times revenue and 34.5 times earnings. Moreover, Bayer also pays a handsome dividend amounting to an annual yield of 4.29%.
During the second quarter of 2021, Bayer’s revenue increased by 8% year over year to 10.854 billion euros. At the same time, its core earnings per share improved to 1.61 euros.
Out of its crop science, consumer health, and pharma segments, the latter delivered the best performance. Pharma sales jumped 12.6% year over year in Q2, driven by strong prescription growth in oral anticoagulant Xarelto, Eylea for combatting retinal disease, and contraceptives Mirena and Yasmine. In addition, Bayer has eight products in phase 3 clinical trials, mainly in the field of oncology, along with five biologics pending regulatory clearance. It also advanced its next-generation cell and gene therapy programs into phase 1 for the first half of 2021.
Bayer remains primed to absorb any losses from legacy legal issues. Right now, the company’s financial leverage, as defined by net debt divided by operating income less noncash items, stands at only 1.38 — far short of the multiple of four or five most rating agencies would consider risky.
I expect Bayer will resolve its legal issues within the next five years. And I think its pharmaceutical segment will spearhead the company’s new path to growth.
This pharma giant still has room to grow
Prosper Junior Bakiny (Eli Lilly): Eli Lilly is currently firing on all cylinders. The company’s shares are up more than 75% in the past year, more than double the gain for the S&P 500. For more context, consider that the SPDR S&P Pharmaceutical ETF — an industry benchmark — is up by a comparatively modest 12% over the past 12 months. Eli Lilly owes this performance to strong financial results and promising pipeline programs.
During the second quarter, the drugmaker’s revenue jumped by 23% to $6.7 billion. Sales of diabetes medicine Trulicity increased by 25% year over year to $1.5 billion, while revenue from Verzenio, a cancer drug, soared by 54% to $341.3 million.
Lilly boasts over half a dozen blockbuster products. Most of these medicines are growing their sales by double-digit percentages on a year-over-year basis. The company is also benefiting from its COVID-19 antibodies for now. Excluding revenue from its antibody products, Eli Lilly’s top line for the first half of the year jumped by 11% compared to the six months period ending June 30, 2020.
Investors can expect the company to continue delivering strong financial results, especially as it bolsters its lineup with new additions and label expansions. One of Lilly’s most promising pipeline candidates is Basal Insulin-Fc (BIF), a once-a-week insulin product for people with type 2 diabetes. Type 2 diabetes patients do not necessarily need insulin, but about 40% of this population require daily insulin injections, according to some estimates. As a once-a-week insulin option, BIF is likely to attract a large market, if approved.
Also, the company’s oral diabetes drug Jardiance recently delivered positive results in a phase 3 clinical trial as a treatment for heart failure. A regulatory nod seems highly likely here, which would be a big deal for the company.
Then there is Lilly’s investigational Alzheimer’s disease drug, donanemab, which earned a breakthrough therapy designation from the U.S. Food and Drug Administration in June. Donanemab’s future looks better than ever, thanks in part to the recent approval of Biogen‘s Alzheimer’s drug, Aduhelm.
But even if this program doesn’t pan out, Eli Lilly has a rich pipeline with potential medicines for diabetes, cancer, rheumatoid arthritis (and other autoimmune disorders), and more. Shares of the pharma giant could certainly lose altitude if donanemab hits a clinical or regulatory roadblock, but in the long run, the company has more than enough fuel left in its growth engine to continue beating the market.
Growth, income, and value rolled into one stock
Keith Speights (Pfizer): If you want to buy a stock that offers growth, income, and value, I think Pfizer could be just what you’re looking for. The giant drugmaker certainly delivered strong growth in its latest quarter, with revenue soaring 92% year over year to nearly $19 billion. Adjusted earnings jumped 75%.
The biggest growth driver for Pfizer during Q2 was its COVID-19 vaccine developed with BioNTech. However, the company also had other huge winners, notably including transthyretin amyloid cardiomyopathy drug Vyndaqel/Vyndamax and pneumococcal vaccine Prevnar 13.
Pfizer expects to generate risk-adjusted earnings growth in the double-digit percentages through 2025. And that projection excludes any sales from its COVID-19 programs.
Income investors will probably like Pfizer’s dividend yield of 3.26%. With the massive cash that its COVID-19 vaccine continues to generate, it seems likely that additional dividend hikes will be on the way.
What about value? Pfizer stock trades at less than 12 times expected earnings. That’s cheap compared to most S&P 500 stocks and is a more attractive valuation than many big pharma stocks.
I look for Pfizer to launch several successful new products over the next few years. The company’s next COVID-19 blockbuster just might be its antiviral therapy PF-07321332. Pfizer hopes to file for U.S. Emergency Use Authorization of the experimental drug by the end of this year.
My prediction is that Pfizer will continue to deliver solid growth and income for investors. However, I don’t think its valuation will remain as appealing for too much longer.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.