If you want to get great value by investing in big drug companies, you need to look at good companies that are in tough situations. Given the industry’s long product development times, with most drugs taking more than seven years from entry into clinical trials to release, the period of uncertainty is likely to continue for a significant period of time.
But good things tend to happen to those who can wait. With that in mind, let’s consider two pharmaceutical stocks that are incredibly cheap and worth buying now, assuming you’re willing to patiently wait for long-term strategic plans to unfold over the next few years. Let’s.
1. Pfizer
pfizer (New York Stock Exchange: PFE) The company is a pharmaceutical stock that needs no introduction. Or perhaps it’s more accurate to say that the recent heyday of coronavirus vaccine and antiviral drug sales was self-explanatory, but it’s over.
In 2022, sales of these anti-coronavirus drugs generated more than $100 billion in revenue. Currently, Pfizer appears to be struggling, but its extensive pipeline including 33 late-stage clinical programs, recent major acquisitions, and ambitious plans for expansion through 2030 make it a strong position for future growth. It has the potential to become a driving force. The total return from the company’s stock has declined by 20% over the past three years. Last year, the company reported several quarters of operating losses rather than profits, and its 12-month sales declined to $55 billion.
There are several valuation factors that support the idea that Pfizer stock is undervalued. Sales ratio (P/S) The ratio is 3. Price vs. Free Cash Flow (P/FCF) The ratio is 34, which compares favorably with other large pharmaceutical companies such as: novo nordisk The P/FCF multiple is near 55 and starting to look a little bubbly.
Brighter days are ahead for Pfizer. The company supports the idea of ​​buying its own stock at its current valuation.
The company is running a manufacturing cost-cutting campaign that aims to cut costs by up to $1.5 billion by early 2028, in addition to a separate initiative aimed at cutting costs by $4 billion by the end of this year. Management has indicated that it will accelerate both reinvestment in internal research and development (R&D) activities and return of capital to shareholders in the near future.
And that’s likely to happen around the same time as the newly acquired oncology business launches and begins to drive growth, which could be a powerful cocktail for the company’s stock value to say the least.
2. Merck
Just like Pfizer, Merck (NYSE:MRK) Although the company has had several unprofitable operating quarters in recent years, it also has more than 30 programs in Phase 3 clinical trials, at least some of which will be more profitable in the coming years. .
But more important than recent woes is the impending patent expiration of the blockbuster cancer drug Keytruda in 2028. Keytruda sales contributed more than $7 billion of the drug company’s total revenue of approximately $16 billion in the second quarter. , It is a major pillar that supports the top line. There are several programs related to expanding the drug’s approved indications, and revenues are likely to continue to grow over the long term, but Merck is unlikely to simply stall after generics steal market share. It is uncertain how it will continue to grow. There is no doubt that the partnership with Keytruda is a factor in lowering the company’s reputation.
Merck’s P/S multiple is approximately 4x and P/FCF is 21x. As a result, the company’s valuation is slightly higher than Pfizer’s per dollar of revenue, but significantly lower than Pfizer’s per dollar of free cash flow. In other words, it’s cheap, but not so cheap that it gets ignored in the bargain bin.
Investment in research and development continues to be our top capital allocation priority, followed by capital expenditures and dividend payments. Share buybacks are at the bottom of the priority list, which may be an ancillary reason why many investors avoid the stock despite its low valuation, but it still It makes no sense for investors to bet on continued production of Merck’s pipeline. clearly states that the funds will continue to be used to accelerate research and development activities, rather than stifle them.
I think the only reason the market is playing it safe is because there is still no clear long-term revenue stream to replace Keytruda. However, I also believe that with solid investment in research and development, Merck is fully capable of ultimately bringing multiple drug candidates to market that not only replace its existing drug portfolio, but also far exceed expectations. I am.
The company is also investing heavily in acquiring promising programs from biotechs. On October 1, the company announced a $750 million acquisition of early clinical stage assets that can treat both relapsed or refractory non-Hodgkin lymphoma (NHL) and relapsed or refractory B-cell acute lymphoblastic leukemia (ALL). Signed a contract worth US$. . And with over $11 billion in cash, equivalents, and short-term investments on hand, it has plenty of dry powder to explore promising growth opportunities.
So take advantage of this stock while its price is low. Because it probably won’t be this cheap for long.
Should I invest $1,000 in Pfizer right now?
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Alex Karkidi has no position in any of the stocks mentioned. The Motley Fool has a position in Merck and Pfizer and recommends Merck and Pfizer. The Motley Fool recommends Novo Nordisk. The Motley Fool has Disclosure policy.
2 Incredibly Cheap Big Pharma Stocks to Buy Right Now Originally published by The Motley Fool
