AbbVie is an affordable biopharma stock that should see earnings growth ahead.
Courtesy of AbbVie
There’s value to be found in big biopharma stocks.
The S&P 500 Pharmaceutical, Biotech & Life Sciences industry group index is up 6.2% so far this year, trailing the broader S&P 500, which is up 9.6%.
Meanwhile, many of the big pharma firms are trading at price-to-earnings multiples that are well below the market average, as Barron’s argued in a mid-March feature.
Still, that value can take work to uncover. Some of the big biopharma names have soared this year, such as Eli Lilly stock (ticker: LLY), which is up 16.4% in 2021.
Now, we’ve screened for the five biopharma stocks in the S&P 500 with the highest long-term growth potential trading at the cheapest valuations.
To find them, we picked the 10 biopharma stocks in the S&P 500 that will have the highest average long-term growth in per-share earnings, according to analyst estimates on FactSet. Then, we selected the five of those stocks that are trading at the lowest multiple of earnings expected over the next 12 months, also per FactSet.
Barron’s has run this screen twice before, most recently in February and back in July 2020. The list has changed since then, in ways that are indicative of shifts in the fates of the big biopharma giants. Most are stocks with promising growth opportunities that have been held back by one big worry, usually over looming competition for a key drug.
This time, the stocks that passed our screen were Bristol Myers Squibb (ticker: Bristol Myers Squibb ), AbbVie (ABBV), Merck (MRK), Alexion Pharmaceuticals (ALXN), and Amgen (AMGN).
In February, the screen returned the same list, except in the place of Amgen , it spat out Pfizer (PFE).
Analysts’ outlooks for Pfizer , however, have been scrambled by the company’s extraordinary Covid-19 vaccine sales. The company now says it expects $26 billion in Covid-19 vaccine sales this year alone, up from the $15 billion it projected in February.
What’s more, analysts are now updating their models to bake in substantial sales of Pfizer’s Covid-19 vaccine next year. Morgan Stanley analyst David Risinger wrote earlier this month that he expects $32 billion in Covid-19 vaccine sales for Pfizer in 2022, up from his previous estimate of just $5.6 billion. The FactSet consensus estimate for next year is now $9.7 billion.
Analysts don’t expect the Covid-19 vaccine market to last at its current size, which appears to have had a negative impact on the average estimated long-term growth rate of earnings per share, as calculated by FactSet. Still, the company says it is on track to meet its pre-pandemic goal of 6% revenue growth per year over the next five years, excluding its Covid-19 vaccine sales.
Pfizer shares are moving, gaining 14.2% over the past three months, while the S&P 500 has climbed 4.7% over the same period.
Shares of Amgen, the list’s new entrant, have climbed 5.5% over the last three months, and 8.1% so far this year. The stock trades at 14.9 times earnings expected over the next 12 months, a relatively high multiple for the big biopharma group. But its estimated long-term earnings-per-share growth rate is high, too, at 10%, also according to FactSet.
Amgen’s earnings report disappointed in late April, with both top- and bottom-line misses. The stock’s big problem? Growing competition for its core sellers, including the psoriasis drug Otezla, and Enbrel, which treats arthritis, among other conditions.
“We believe that Amgen’s solid dividend support… continued share repurchases and significant late-stage pipeline should be enough to give the stock support in the $230-240 range, but investors will likely be concerned about the ability of drugs such as Otezla, Enbrel, Aimovig and the biosimilars to resist the pressure of price-based competition,” wrote SVB Leerink analyst Geoffrey Porges in an April 28 note. The stock closed Wednesday at $248.63.
Still, analysts are optimistic about Lumakras, an experimental Amgen cancer drug of the sort known as a KRAS inhibitor. In a note on May 16, Oppenheimer analyst Jay Olson wrote that Amgen will enjoy “first-mover advantage” in the KRAS inhibitor space, and he expects $3.3 billion in Lumakras sales in 2030. “We suspect AMGN’s first mover advantage may be insurmountable for” Mirati Therapeutics (MRTX), a competitor seeking to bring a similar drug to market, he wrote.
Of the 29 analysts tracked by FactSet who cover Amgen, 13 rate it a Buy, while 13 rate it a Hold. The other three rate it Underweight.
The picture with the rest of the companies that passed our screen is similarly mixed: Strong potential for future growth, but plenty of short-term worries weighing down their shares.
Take Merck. Analysts expect long-term earnings-per-share growth of 7.2% for Merck, which trades at 9 times earnings expected over the next 12 months. Like Amgen, Merck turned in disappointing financial results for the first quarter of the year. In the short term, Covid-19 has dented sales of the company’s vaccines. Sales of its HPV vaccine Gardasil were down 20% compared to the same quarter in 2020.
Those vaccine sales should come back. The longer-term worry facing Merck is the company’s reliance on its mega-blockbuster cancer drug Keytruda, which was responsible for $3.9 billion of the company’s $12.1 billion in sales in the first quarter of 2021. Still, analysts remain positive on the stock. Of the 22 tracked by FactSet who cover Merck, 17 rate it Overweight or a Buy, while five rate it a Hold.
Also on the list is Bristol, with a long-term earnings-per-share growth rate estimated at 5.7%, and which trades at 8.5 times earnings expected over the next 12 months, according to FactSet. Bristol’s earnings for the first quarter also disappointed. Like the others on the list, Bristol has a promising pipeline, but will face competition on many of its drugs in the coming years.
In a late April note, Morgan Stanley’s Risinger wrote that products that account for 76% of the company’s estimated 2025 revenue will face biosimilar and generic competition by 2030.
“Management is delivering solid financial results,” Risinger wrote at the time. “But we have less conviction that pipeline news flow will drive shares higher.”
Bristol shares are up 5.7% so far this year. Of the 20 analysts who cover the stock tracked by FactSet, 13 rate it a Buy or Overweight, while seven rate it a Hold.
As for AbbVie , the fourth entrant on the list, the worry is the company’s reliance on Humira, the world’s best-selling pharmaceutical. The company reported $4.9 billion in sales of Humira in the first quarter of 2021, out of $13 billion in total sales.
Members of Congress raked AbbVie over the coals on Tuesday for its pricing practices, with the House Oversight Committee releasing a staff report accusing the company of “exploiting the patent system,” among other things. The company’s CEO, Richard Gonzalez, faced questioning from committee members. Gonzalez defended the company’s approach, saying it spends heavily on research, and said that the design of the Medicare prescription drug benefit was responsible for some of the high costs.
Of the 24 analysts who cover AbbVie, 17 rate it a Buy, while six rate it a Hold, and one rates it Underweight.
Also on our list is Alexion, though the meaning of analyst projections for its future performance is questionable. The company is in the process of being acquired by AstraZeneca (AZN) for a total consideration worth $175 per share. The stock is now trading at that price. AstraZeneca says that the deal is expected to close in the third quarter of this year.
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