It's hard to believe, but over the past year, the pharmaceutical industry has fared worse in the stock market than the energy sector. Some sword-rattling from political candidates sent the SPDR S&P Pharmaceutical ETF (NYSEMKT: XPH) crashing to a level it hasn't seen since late 2013.
Despite the recent drop, the ETF tracking bigger pharmas is still miles ahead of the broad market. And although the industry as a whole has fallen out of favor recently, I believe once the dust settles after November this group will continue its march upwards.
In the meantime, a handful of big pharmas are trading at ridiculously low prices based on their forward earnings estimates. Shares of Allergan (NYSE:AGN), Merck & Co. (NYSE:MRK), Novartis (NYSE:NVS), Pfizer (NYSE:PFE), and Roche (NASDAQOTH:RHHBY) are trading at clearance rack prices.
Let's take a closer look at some of the individual bargains.
Allergan is growing quickly
This is the smallest of the five, and wouldn't have made the cut if I didn't believe it could reach the size of its older, larger peers in the coming decade.
Allergan, or Actavis depending on your point of view, began a spending spree a few years back, growing revenue 585% since the end of 2013 to burning through an astounding $17.84 billion over the last twelve months.
My first thought when I see figures like this is: "Are shareholders benefiting as much as the company's top line?" Allergan used combinations of cash and shares (lots of shares) to make these acquisitions, which reduces investors' slice of future profits.
Far too often, acquisition sprees result in big top line growth, but the profits don't follow. This hasn't been the case for Allergan.
Despite the massive share dilution the acquisitions caused, long term Allergan investors have seen free-cash-flow rise on a per-share basis at an astounding rate.
When the bottom dropped out of the Pfizer merger, the market turned its back on Allergan. They've started returning, but you can still buy this big pharma stock for about 16 times this year's earnings estimates. For a company growing so fast, that's ridiculously cheap.
Merck has an exciting cancer pipeline
With the hiring of Amgen's former R&D head, Roger Perlmutter, a few years back, Merck began shaking off its stodgy old pharma image. The plan's working.
Merck's exciting new cancer therapy, Keytruda, makes it difficult for tumors to hide from the immune system, and helped send former President Carter's case of melanoma -- which had spread to his brain and liver -- into remission. The drug is in over 270 clinical trials across more than 30 tumor types. More than 100 of these trials are in combination with other therapies. Through collaborations and outright acquisitions, Merck aims to become an immuno-oncology giant, and "stodgy" hardly describes this company any longer.
Some billionaires have become fans of this big pharma stock, and retirees looking for a source of income in the form of dividends should be too. It's raised distributions for five consecutive years, and currently offers a juicy 3.4% yield.
First quarter sales of Keytruda rose 16% over the previous quarter, and the drug's on pace to pass the $1 billion blockbuster mark this year. Whether or not Merck's oncology aspirations will offset losses from its aging top sellers will become clearer after the company presents findings in a slew of new tumor types at a scientific conference early next month.
The market has begun noticing Merck's potential, but at a price of around 15 times this year's earnings estimates the big pharma stock is still insanely cheap. Depending on the data presented next month, it might not stay that way much longer.
Novartis' heart failure drug primed for growth
Late last year, I predicted sales of Novartis' new heart failure drug would explode this year. First quarter Entresto sales of just $16 million make me look ridiculous, but I'm not changing my tune.
Entesto is currently approved for treatment of about 3 million Americans who suffer from a certain form of heart failure. Novartis has a growing stack of studies, one of which shows the drug reduces these patients' risk of death or hospitalization due to cardiovascular causes by 20% or more over the former standard-of-care.
That's right: U.S. and EU guidelines now recommend Entresto, instead of the previous standard treatments.
An annual cost of about $4,500 per year made reimbursement a huge hurdle, but one I think it's finally crossed. When the company last reported, it claimed over 90% of Medicare patients have access to the drug, with 65% at the lowest branded co-pay by plan.
Entresto isn't the only potential blockbuster to emerge from Novartis' pipeline recently. Its Sandoz division has a handful of biosimilars referencing some of the world's best-selling biologic therapies. Some of these biosimilars could eventually reach annual sales over the $1 billion mark themselves.
Novartis has raised its annual dividend, in Swiss Francs, for 19 consecutive years, and ADRs in the U.S. sport a tempting 2.9% yield, or 3.4% depending on how you're taxed. With a late-stage pipeline ready to pump up profits, a recent price of about 14.4 times this year's earnings estimates is just plain silly.
Pfizer for dividends
Pfizer has been acquisitive in recent years. However, there are some key differences between the No. 1 and No. 2 cheap big pharma stocks on this list. First, in recent years Pfizer lost exclusivity for Lipitor (once the world's best selling drug) and U.S. and Canadian sales of Amgen's Enbrel.
Another feature that sets Pfizer apart from Allergan is a lack of recent share dilution. Since the Wyeth deal in 2009, Pfizer hasn't been diluting shares to make acquisitions, although not for lack of effort. Instead, it's using smaller, but still enormous, cash flows to purchase smaller companies, such as Hospira, and more recently Anacor Pharmaceuticals.
Also helping the company return to growth is its late-stage pipeline. Approved just last year, first-in class breast cancer therapy Ibrance finished the first quarter with $414 million in sales. Another label expansion in February should help propel it toward peak annual sales estimates north of $3 billion sooner than expected.
Pfizer's shares have been recovering ever since the Allergan deal collapsed, but it's still ridiculously cheap at less than 14-times this year's earnings estimates. Not only is Pfizer trading at bargain basement prices, this big pharma stock boasts a hefty 3.6% dividend yield.
Roche is firing on all cylinders
Roche's top selling drugs Rituxan and Herceptin are widely expected to face pricing pressure from biosimilar competition in the years ahead. In the first quarter the pair made up 28% of the company's reported total sales of about $12.5 billion.
While that's certainly a significant concern, the company has a handful of drugs on pace to reach over $1 billion in sales this year that grew sales by double-digits in the first quarter compared to the same period last year. It also boasts what I think is the most exciting late-stage pipeline in big pharma. Its latest approval, Tecentriq for treatment of bladder cancer, is the first in its class, although it limits cancer cells' ability to hide from the immune system along the same path as Keytruda does. It's early, but this difference might lead to approvals for more indications not yet served by drugs in this class, such as bladder cancer.
Another drug under priority review at the FDA could be another first-in-class therapy for at least 10% of multiple sclerosis patients who currently have zero available therapies to slow the progression of their disease. It's also under review for the wider relapsing population, and I believe it could become the best selling multiple sclerosis treatment in the years ahead.
I think Roche's future looks better now than it did several years ago, and recent prices of around 16 times this year's earnings estimates don't make much sense. Consider the dividend yield between 3.2% and 2.6%, depending on your tax situation, and about $31.60 per share just looks absurd.
Like Novartis, Roche pays annually, and has increased its distribution, in Swiss Francs, for 29 consecutive years. That's just a few years longer than the Clintons have been railing against high drug prices.
I won't share my predictions for this November's elections, but I doubt Roche, or any of these big pharma stocks, will be this cheap for much longer.
Cory Renauer has no position in any stocks mentioned. You can follow Cory on Twitter @TMFang4apples or connect with him on LinkedIn for more healthcare industry insight. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.