Pharma stocks experienced an abysmal first half due to various factors. Rotation from defensive to cyclical sectors, drug price negotiations and upcoming patent cliffs have muddied the outlook. As a result, they have underperformed, creating undervalued pharma stocks to buy.
Overall, the VanEck Pharmaceutical ETF (NASDAQ:PPH) is flat for the year. Only a few stocks have performed well. For instance, as of this writing, Eli Lilly (NYSE:LLY) and Novo Nordisk A/S (NYSE:NVO) are up 23% and 16.67%, respectively. The two have soared on the prospects of their weight loss drugs.
Indeed, these stocks have better earnings prospects if their drugs are approved for weight loss. But they have run up too much and are expensive, trading at over 30 times trailing annual EPS. Thus, investors looking for cheap pharma stocks should look at year-to-date laggards.
These undervalued pharma stocks are down for the year. According to Finviz, they have a positive 5-year earnings growth outlook and trade at a forward price-to-earnings (P/E) under 15.
GSK plc (GSK)
This U.K.-based drugmaker had a prolonged period of underperformance in the 2010s. In April 2021, Elliot Management began an activist position to unlock value in the company. Consequently, it spun off its consumer health business, Haleon, in July 2022.
So, what makes GSK plc (NYSE:GSK) one of the top undervalued pharma stocks for July 2023? First, it has a market-leading position in vaccines, with a broad portfolio of 25 vaccines sold in 160 countries. Its shingles, meningitis, and pediatrics vaccines are leaders in their categories. The business accounts for 30% of revenues.
Second, its vaccine pipeline offers plenty of growth opportunities. For instance, in May the FDA approved Arexvy, their respiratory syncytial virus (RSV) vaccine. E.U. and U.K. regulators followed suit the next two months.
The third growth driver is the HIV business which accounted for about 20% of sales in 2022. Per management’s guidance at the JP Morgan Healthcare Conference, they expect mid-single digits sales CAGR in this segment.
Driven by the vaccines and HIV business, management forecasts above 5% sales CAGR between 2021-2026. Also, GSK is a focused biopharma company after the demerger and operating margins will improve.
The market isn’t giving credit to GSK for its quality vaccine and HIV portfolio. It trades at a bargain forward P/E of 8 and pays a 4% dividend. Besides, after the Haleon spin-off, it has the cash to make acquisitions. Deals like the recently completed $2 billion acquisition of Bellus Health will supplement their sales growth.
Since its announcement to acquire Horizon Therapeutics (NASDAQ:HZNP), Amgen (NASDAQ:AMGN) has slid significantly. The stock closed at $276 on the announcement day and is now at $230.
The deal has faced opposition from politicians and regulators, making investors skeptical. Senator Warren sent a letter urging the Federal Trade Commission (FTC) to scrutinize the deal heavily. Then, on May 16 the FTC sued to block the acquisition. Although AMGN will defend the merits of the purchase in court, there are risks to closing.
Moreover, the trial is scheduled for September and has left AMGN stock in limbo till then. The decline has made it one of the undervalued pharma stocks to buy. As of this writing, it trades at a 12 forward P/E multiple.
Indeed, Horizon’s Tepezza sales growth will mitigate revenue declines from Amgen’s upcoming patent cliff. In the coming years, the company faces revenue declines from the loss of exclusivity of key drugs. For instance, Enbrel is already facing pressures and Prolia expires in 2025.
Management is confident about closing the Horizon acquisition.
“So, I think in terms of our confidence in the law, we’ve been very clear and I would reiterate this morning that there are — we don’t believe there are any anti-competitive issues that just stand in the way of the two companies coming together,” CEO Robert Bradway stated at the Goldman Sachs Healthcare Conference,
If the acquisition is blocked, Amgen is still poised for growth. The company has invested in therapeutic areas, including oncology, inflammation, and general medicine. Their oncology pipeline includes promising late-stage drugs like Bemarituzumab and Tarlatamab. Furthermore, the company has a robust biosimilar portfolio and expects sales in the segment to double by 2030.
Bristol-Myers Squibb (BMY)
Undoubtedly, Bristol-Myers Squibb (NYSE:BMY) faces the steepest patent cliff. Key drugs are losing exclusivity.
Back in 2019, a key milestone in the company’s history was the Celgene acquisition. The combination brought a robust immuno-oncology portfolio that would turbocharge growth. Notably, they gained access to Celgene’s blockbuster drug Revlimid which was growing rapidly.
But now the tide is turning. Revlimid, for instance, lost exclusivity in the U.S. in March 2022. As a result, sales peaked at $12.8 billion in 2021 and dropped 22% to $9.9 billion in 2022. And the decline is accelerating. In Q1 2023, Revlimid sales fell -37% year over year. Additionally, Abraxane has lost exclusivity, and Sprycel will do so in 2024.
But Bristol Myers has prepared adequately for these losses. In 2022, it launched three first-in-class products – Opdualag, Camzyos and Sotyktu – all with the potential to achieve $4 billion-plus in revenues. Management expects these drugs and others to replace lost sales and drive growth.
Already these drugs are showing great promise. Based on management forecasts, new products will add $10 – $13 billion by 2025 and $25 billion by 2030. Therefore, looking ahead, revenues are materially de-risked.
Regarding valuation, BMY stock is a bargain for investors looking for undervalued pharma stocks. The guidance issued after Q1 FY2023 results forecasts $7.95 – $8.25 non-GAAP EPS in 2023. Therefore, the stock has a forward P/E of 8 and pays a solid 3.6% dividend yield.
On the date of publication, Charles Munyi 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.