Saving the World, Still Trading Cheaply

Big Pharma is not the most popular industry -- rising prescription-drug costs make it a tempting target for politicians. But it's not just Washington. Wall Street doesn't seem to like the drugmakers much either. 

For large caps, their stocks remain extraordinarily cheap, as Andrew Bary of Barron's highlighted earlier this year. And these are companies with strong cash generation and impressive science. 

The biggest U.S. pharmaceutical companies trade for an average of 13.9 times estimated 2022 earnings, compared with a price-to-earnings ratio of 21 times for the S&P 500. And that average for drugmakers is inflated by Eli Lilly and its high multiple. Take Lilly out of the calculation, and the big drug companies trade for an average 10.9 times forward earnings. 

At the same time, a number of drugmakers have played a critical role in the fight against Covid-19. Shouldn't they get more credit from investors? 

Pfizer, for one, may be starting to win some of them over. Its stock rose 1% today after its Covid antiviral pill received emergency use authorization from the Food and Drug Administration for people at high risk. The drug "decreased the risk of hospitalization and death in a trial of unvaccinated, high-risk adults by 89% when taken within three days of when symptoms began," Josh Nathan-Kazis wrote on Barrons.com today. 

The regulatory green light comes at a time of grim headlines about the Omicron variant and a little more than a year after the FDA issued the first emergency use authorization for Pfizer's and BioNTech's Covid vaccine. It would appear to be another vindication of Pfizer's strategy to streamline and focus on its science as a biopharma pure play.

Josh made the case that the company could make such a successful transformation in a cover story in November 2019. 

For Pfizer's new Covid pill, called Paxlovid, blockbuster sales are forecast.  Josh noted: 

Mizuho analyst Vamil Divan wrote Dec. 17 that he expects around $24 billion in sales of the drug in 2022, and $16 billion in 2023. SVB Leerink analyst Dr. Geoffrey Porges also expects $24 billion next year, though he indicated in a Dec. 15 note that he could increase that figure.

Since early November, Pfizer shares have climbed about 36%, far outpacing the S&P 500. Some 36% of Wall Street analysts now have the equivalent of Buy ratings on the stock, according to FactSet, the highest percentage since November 2020. 

Covid, unfortunately, will be with us for a while. Cheap drug stocks may not.