There are multiple reasons to consider exposure to pharmaceutical stocks for the long-term portfolio. First, pharma stocks have a low-beta and provide and help in reducing the overall beta of a portfolio that’s overweight growth stocks. Further, pharma stock represents a business that’s relatively immune to economic shocks.
At the same time, well established pharma companies have healthy cash flows and therefore sustained value creation through dividends. With these factors in consideration, investors should look at undervalued pharma stocks for the portfolio.
I must add here that the global disease burden has been rising. Pharmaceutical companies aggressively investing in research and development are likely to benefit from drugs launched for various conditions. The focus of this column is therefore on blue-chip pharma stocks with high financial flexibility to invest in building an attractive drug pipeline.
Given the low-beta factor, it’s unrealistic to expect high returns. However, the undervalued pharma stocks discussed have the potential to beat index returns on a consistent basis.
Pfizer (PFE)
Pfizer (NYSE:PFE) stock is in a phase of peak pessimism and trades at a valuation gap. After a correction of almost 30% in the last 12 months, the biopharmaceutical stock trades at a forward P/E of 11.8. The stock also offers a healthy dividend yield of 6%. In my view, this is the best time to accumulate PFE stock for healthy total returns.
There is no doubt that Pfizer’s growth has been impacted in a post-pandemic world as Covid-19 vaccine sales decline. At the same time, drugs going off-patent have impacted growth. However, at current valuations, these factors are discounted.
It’s worth noting that Pfizer has been building base for the next stage of revenue acceleration. On the organic front, the pharma company has a deep pipeline of 113 molecular entities. With 37 candidates in phase three and three in the registration phase, there is visibility for growth as new drugs are commercialized.
On the inorganic front, Pfizer has pursued multiple acquisitions in the last 12 to 18 months. The most prominent being that of Seagen. The acquisition was completed in December 2023 and establishes Pfizer as a leading oncology company. This diversification will support long term growth.
Merck (MRK)
Merck (NYSE:MRK) stock has not been depressed like Pfizer. On the contrary, the stock has trended higher by 18% in the last 12 months. However, valuations remain attractive and MRK stock offers a dividend yield of 2.36%. For a long-term investor, fresh exposure can be considered at current levels.
For Q1 2024, Merck reported healthy sales growth of 9% on a year-on-year basis to $15.8 billion. The oncology and vaccine segment were sales growth drivers. It’s worth mentioning here that based on the oncology pipeline, Merck expects sales of $20 billion from the segment by mid-2030s.
Further, if we look at the overall pipeline, there is clear visibility for sustained growth. Currently, Merck has 80 programs in the second phase, 30 in the third phase, and 10 programs under review. For Q1 2024, Merck reported research and development expense of $4 billion. Aggressive investment in R&D will continue to ensure that the pipeline remains robust.
AstraZeneca (AZN)
After an extended period of consolidation, AstraZeneca (NASDAQ:AZN) stock has trended higher by 17% for year-to-date. I believe that AZN stock remains undervalued. Further, the biopharma stock offers a healthy dividend yield of 2.5%.
For 2023, AstraZeneca reported revenue of $45.8 billion. The biopharmaceutical company has guided for a revenue target of $80 billion by the end of the decade. Therefore, there is visibility for sustained growth and cash flow upside. The company has also guided for mid-30s% core operating margin by 2030.
It’s worth noting that AstraZeneca has 182 projects in the pipeline with 19 new molecular entities in the late-stage. The guidance to launch 20 new molecular entities by 2030 is realistic.
Another growth driver for AstraZeneca is wide geographic presence. The company reported 26% growth in emerging markets. However, excluding China, emerging market growth was 40% on a year-on-year basis. There is ample headroom for growth in markets like India. Overall, AstraZeneca, with a deep pipeline, is positioned to achieve its ambitious growth target and create value on a sustained basis.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
