Investors have shown little interest in pharmaceutical stocks this quarter, despite the performance of the companies. Whether the results were positive or negative, investors have been quick to hit the "sell" button.
However, this could present an opportunity for savvy stock pickers to find potential bargains. Nevertheless, the pharmaceutical sector is facing a range of challenges.
The disappointing earnings season began with Johnson & Johnson (JNJ), which raised its full-year guidance and exceeded Wall Street estimates for the third quarter. Despite these positive developments, J&J's shares still fell by 0.9% and eventually reached a 52-week low on October 27.
Unfortunately, the trend continued with other drugmakers. Bristol-Myers Squibb (BMY) experienced a 6.4% decline in shares on October 26, despite beating earnings expectations. AbbVie (ABBV) saw a 4.3% drop in shares after beating its earnings, and Sanofi's (SNY) stock tumbled by a staggering 19.1% following its earnings report.
More recently, Amgen (AMGN), GSK (GSK), and Moderna (MRNA) all encountered declines after reporting their earnings. Pfizer (PFE) managed to close up 0.3% after reporting earnings last Tuesday but not before hitting a new intraday 52-week low.
These sell-offs are happening at a time when investor sentiment towards big pharma is at a low point, with the exception of Eli Lilly (LLY) and Novo Nordisk (NVO), the companies behind the new anti-obesity drugs. While Lilly's shares have gained 55.8% this year and Novo's have risen by 45.5%, the rest of the sector is underperforming the market. In a year when the S&P 500 has seen a 13.5% increase, Pfizer is down by 39%, Bristol Myers is down by 26.7%, Merck (MRK) is down by 6.6%, and Johnson & Johnson is down by 14.3%.
The strong performance of Lilly and Novo may be a contributing factor to the slump experienced by other drugmakers. The excitement surrounding the weight loss drugs from these two companies has captured a significant amount of investor attention and capital. As a result, there may be limited room in portfolios for other pharmaceutical stocks.
Promising Opportunities in the Pharma Sector
The pharmaceutical industry is currently facing a number of challenges. Drugmakers are struggling to disrupt the implementation of a new program that would allow Medicare to negotiate prices for high-priced drugs. Additionally, U.S. antitrust regulators are scrutinizing pharma mergers, and many companies are approaching steep patent cliffs. Moreover, the once attractive dividend yields offered by drug stocks are no longer compelling.
Nevertheless, there are still some drugmakers whose shares appear to be undervalued, particularly following recent selloffs. One such company is Merck. Analyst Chris Shibutani from Goldman Sachs believes that Merck's diversified pipeline and portfolio are well-prepared to generate sustained growth in the medium and long term. As a result, Shibutani has given Merck a Buy rating and set a $131 target price for the stock.
According to FactSet, Merck shares are currently trading at 14 times the expected earnings over the next 12 months, which is in line with its 5-year average. The company has also made several astute deals in recent years, including the successful acquisition of Acceleron Pharma for $11.5 billion. Acceleron's heart drug sotatercept has performed well in clinical trials and is anticipated to become a blockbuster.
Another drugmaker that analysts favor is AstraZeneca (AZN) from the U.K. Out of the 31 analysts tracked by FactSet, 27 have rated AstraZeneca as a Buy or Overweight. The company's American Depositary Receipt (ADR) has experienced a 5.7% decline this year and is currently trading at 15.6 times the expected earnings over the next 12 months, significantly below its five-year average of 19.5 times earnings.
Analysts are particularly enthusiastic about two treatments under development by AstraZeneca. The first is a lung and breast cancer treatment called datopotamab deruxtecan, which J.P. Morgan analyst James Gordon predicts could generate $12 billion in annual revenues at its peak. The second treatment, Enhertu, also garners excitement and could bring in $14 billion a year at its peak, according to Gordon.
AstraZeneca is set to release its earnings report this Thursday.
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