Big pharma firms have been key players during the pandemic, but their stock prices are still down.
Olivier Le Queinec/Dreamstime
The market isn’t giving much credit to the big pharma firms these days. The NYSE Arca Pharmaceutical index (ticker: DRG) is trailing the S&P 500, up 29.8% over the past 12 months while the S&P has climbed 46.8%.
That’s despite companies like Pfizer (PFE) and Johnson & Johnson (JNJ) developing Covid-19 vaccines in record time and pushing aside worries over drug-price regulation that have dogged the sector.
So where should investors look to grab some of that value? Barron’s looked at the biopharma firms in the S&P 500 to find the five that appear to be the most undervalued by investors, at least by one key metric: mean analyst price target compared with actual recent share price.
Wall Street analysts issue price targets to indicate where they expect a stock to trade over the next year or so. The financial information service FactSet averages those price targets for each company. Here are the five biopharmaceutical stocks in the S&P 500 trading the farthest below their mean price targets.
These stocks are widely covered, and the mean price targets are based on price targets set by roughly 20 analysts each, which makes them relatively robust.
Leading the group is the biotech firm Regeneron Pharmaceuticals (REGN), with a mean price target that is 32.9% above its recent share price. Next is Incyte (INCY), followed by Vertex Pharmaceuticals (VRTX), Viatris (VTRS), and the stalwart Merck (MRK).
Regeneron stock is up 1.3% so far this year, and down 0.5% over the past 12 months. The company reported strong earnings on Feb. 5, beating Wall Street expectations. Analysts are particularly excited about Dupixent, the blockbuster eczema drug the company markets in collaboration with Sanofi (SNY).
So why does the stock trade at 32.9% below its mean target price? The company faces growing competition for another key product, the eye-disease drug Eylea. Analysts like SVB Leerink’s Geoffrey Porges, however, say they think Eylea sales can continue to grow. “The most exciting aspect of the company is its next wave of innovative antibodies, starting with Dupixent,” Porges wrote in a March 15 note.
Incyte trades 30.6% below its mean target price. One of the smaller biopharma companies in the S&P 500 by market value, Incyte derives most of its revenues from sales of Jakafi, which treats a number of rare diseases. Incyte’s patent protections on Jakafi will expire in 2027, which poses a risk, and could explain why investors have been skittish. Still, many analysts are fans of the stock, with 12 of the 21 analysts tracked by FactSet who cover the stock rating it Buy or Overweight.
Vertex Pharmaceuticals, which specializes in cystic fibrosis drugs, recently traded 29.5% below its mean target price. Long an investor darling, Vertex stock fell last October, when the company announced that a drug meant to treat a lung-and-liver disorder known as alpha-1 antitrypsin deficiency had failed in a trial, and would be discontinued. Investors had seen the drug as key to Vertex’s growth, and have yet to return.
Yet, analysts see promise in Vertex. Not only is its cystic-fibrosis franchise strong, with patent protections lasting into the 2030s, but it has a compelling pipeline—including another alpha-1 antitrypsin deficiency drug now in Phase 2 trials.
Cowen analyst Phil Nadeau has called Vertex a top large cap pick for 2021. “We expect Vertex to recover in 2021 and would use the recent weakness to build a position in this premier biotech,” he wrote in an early March note.
Viatris was formed last year by a merger between Pfizer ’s (PFE) off-patent drug unit, called Upjohn, and the generic drug manufacturer Mylan. Viatris, recently priced at $14.70 per share, trades at four times earnings expected over the next 12 months, according to FactSet. The stock trades 27.7% below its average target price.
Analysts and investors have worried about Viatris’s long-term growth potential. In a note on March 2, SVB Leerink analyst Ami Fadia wrote that she was “skeptical that there would be significant top-line growth for the business anytime soon.”
Analyst takes are decidedly mixed on Viatris, which faces challenges in China, and will likely face competitive pressures on brands like Viagra that came from Pfizer . Of the 18 analysts who cover Viatris tracked by FactSet, 10 give it a Neutral rating.
The only bona fide big pharma firm in the group is Merck, which trades 26% below average target price. Investors have worried about Merck’s reliance on the cancer drug blockbuster Keytruda, which was responsible for $14.4 billion in sales in 2020. Keytruda’s patent could expire near the end of this decade.
Still, analysts have confidence in the company’s long-term potential: Of the 20 analysts who cover Merck tracked by FactSet, 15 rate it a Buy or Overweight.
Write to Josh Nathan-Kazis at [email protected]
