Pharmaceutical stocks have not shared in this year’s bull rally. Year to date, the S&P Pharmaceuticals Select Industry index is down 1% while the benchmark S&P 500 index has gained 15%. After a strong run during the pandemic when Covid-19 vaccines started being developed, pharma stocks appear to now be taking a breather. With a few exceptions, most major pharmaceutical stocks are down by double digits this year.
There are many reasons for the poor performances including the declining sales of Covid-19 treatments, some blockbuster medications losing their patent protections and a slowing economy that could fall into a recession. Whatever the reasons, the decline has led to many pharma stocks becoming undervalued, presenting an opportunity for investors. Here are the three most undervalued pharma stock to buy now in June 2023.
Eli Lilly (LLY)
It might not be undervalued per se, but pharmaceutical giant Eli Lilly’s (NYSE:LLY) stock has more runway ahead. Up 42% in the last 12 months, including a 27% gain this year, LLY stock looks a little pricey with a price-earnings (PE) ratio of 73. However, it might be worth paying a premium for the stock given its growth potential. Eli Lilly’s share price has a huge catalyst in the form of Mounjaro, a medication that treats Type 2 Diabetes and has also been found to cause dramatic weight loss, opening the door for it to be used to also treat obesity.
Each study released concerning Mounjaro appears to be better than the previous one. Eli Lilly is waiting on approval from the U.S. Food and Drug Administration (FDA) to begin selling Mounjaro as a weight loss treatment, but it is already advertising the medication for Diabetes patients and it is going full force producing the drug in anticipation of getting a greenlight from the FDA later this year. Conservative estimates say that Mounjaro could generate sales of $25 billion for Eli Lilly. This makes LLY stock a buy.
AbbVie (ABBV)
A more obvious undervalued pharma stock is AbbVie (NYSE:ABBV). The company behind the blockbuster drug Humira which is used to treat autoimmune diseases such as rheumatoid arthritis and Crohn’s disease has seen its stock decline 18% this year. The share price is currently trading 25% below its all-time high reached in April 2022. A price-to-earnings ratio of 31 makes the stock seem fairly valued, and shareholders benefit from a hearty dividend that yields 4.45% or $1.48 a share each quarter.
The reason for the slide in ABBV stock is that the company lost patent exclusivity for Humira earlier this year, a situation that is expected to hurt sales and earnings moving forward. There have also been reports of executives at AbbVie selling their stock in the company, with Chief Commercial Officer Jeffrey Stewart selling $4.8 million worth of shares throughout the last 12 months. These events have pushed many investors to the sidelines. However, the decline in ABBV stock has created a buying opportunity for investors who want undervalued pharma stocks.
Merck & Co. (MRK)
Pharma company Merck & Co.’s (NYSE:MRK) stock looks ripe for the picking. Best known for the cancer treatment Keytruda and the HPV vaccine Gardasil, Merck & Co’s stock is flat on the year (up 1%) and it has an attractive P/E ratio of 22, which is low for a company that has a market capitalization of nearly $300 billion. MRK stock also pays a healthy dividend that yields 2.58% or 73 cents a share per quarter. Over five years, MRK stock has nearly doubled, having gained 95% since June 2018.
The reasons for this year’s lackluster performance is declining sales of the company’s Covid-19 antiviral pill called Lagevrio. Slowing sales of the Covid pill dragged Merck’s revenues down 9% to $14.5 billion in this year’s first quarter, which gave analysts and investors some pause. However, long-term, Merck & Co. remains a leading global pharmaceutical company with annual sales of more than $40 billion. The company also has a healthy pipeline of new medications and several blockbuster drugs that remain under patent protection.
On the date of publication, Joel Baglole held a long position in LLY. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
