Stocks of large pharmaceutical companies haven't had a great year in 2020. When investors weren't trying to figure out which businesses would be winners from the pandemic, they were searching out the best growth stories in the technology and consumer sectors.
Investor attention might shift if signs emerge that a vaccine-driven economic recovery is weaker than expected. When the market starts anticipating slow or negative growth, steady and predictable businesses that pay dividends tend to become more valuable.
Pharma stocks in general may be out of favor now, but below are three that I think are particularly timely buys for patient contrarian investors. All three have excellent growth prospects and pay healthy dividends.
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AstraZeneca
British drugmaker AstraZeneca (OTC: AZN) is one of the three front-runners in the race for a COVID-19 vaccine, but you wouldn't know it by watching the stock price lately. Investor indifference might stem partly from a recent stumble in the company's clinical trial for the vaccine. A dosing error clouded the results and observers felt the company wasn't being transparent enough about the data.
Here's why this doesn't matter for investors: AstraZeneca won't make a profit from the vaccine next year anyway. The company has pledged to make AZD1222, which was developed at the University of Oxford, available globally at no profit during the pandemic.
The potential big win from the coronavirus pandemic comes not from AstraZeneca's vaccine, but from the company's long-acting antibody cocktail. The treatment has the potential to prevent disease progression in patients already infected with the virus. It's also a preventive measure lasting up to 12 months for people who can't take a vaccine. The candidate entered phase 3 trials in October. A Morgan Stanley analyst thinks the therapy could increase the company's 2021 profit by $3 billion -- a whopping 30% -- if it succeeds.
Don't buy AstraZeneca for a coronavirus windfall, though. Buy it instead for excellent long-term growth prospects for its drugs in cancer, diabetes, cardiovascular disease, and respiratory ailments. Sales growth in 2019 was 15% in constant currency. Despite pandemic headwinds, AstraZeneca has managed 10% revenue growth so far in 2020 and a 16% increase in core EPS. Next year will bring data readouts from some of the 20 medicines the company has in late-stage clinical trials.
AstraZeneca stock sells for 18 times the consensus estimate of 2021 EPS and has a 2.6% yield.
Merck
Merck (MRK -0.58%) is another company with a coronavirus misstep that has created a buying opportunity. The company is the world's second-largest seller of vaccines, but hesitated to develop one for COVID-19. By the time it joined the race, it was months behind. In a year when investors have been fixated on the pandemic, its shares are down 7% and selling at their cheapest multiple of earnings in the last five years.
Merck may be playing catch-up, but it's not out of the running. The company is focusing on two candidates that rely on proven approaches. They're designed to achieve protection with a single dose and be shipped globally at refrigerator temperatures, rather than requiring an ultra-cold distribution chain. One of the candidates uses the same viral vector technique Merck uses in its approved Ebola vaccine, so success seems likely. The company is partnering with Ridgeback Biotherapeutics on an antiviral drug. It also recently acquired an anti-inflammation drug candidate that it hopes could save the lives of severely ill COVID-19 patients.
Growth for Merck currently boils down to Keytruda. The biggest cancer blockbuster of all time, it's probably destined to become the top-selling medicine in the world. The drug is still young and continues to win approvals for new indications every quarter. In the third quarter, Keytruda sales grew 21% and delivered 29% of the company's revenue.
The pandemic hurt some of Merck's product lines in 2020 more than investors liked, but the company's oncology, animal health, and vaccine products should continue to deliver growth going forward. The company has also invested over $6 billion in the last 12 months in business development, including acquisitions and collaborations, notably strengthening its oncology pipeline.
Early next year, Merck will take a step toward boosting growth when it spins off slower-growing businesses in women's health, legacy brands, and biosimilars into a new company called Organon. Investors might be wary of Merck relying even more on Keytruda, but the businesses being kicked out represent only 15% of revenue from human health. The move should significantly simplify the company, add a full point to top-line growth, and increase operating profit margin.
The spinoff could be a catalyst for the stock. Shares sell for 13 times estimates for EPS next year. The dividend, which Merck says it will maintain after the split, yields 3.1%.
Bristol Myers Squibb
Arguably the best value in big pharma stocks today is Bristol Myers Squibb (BMY 0.66%). The shares sell for a mere eight times forward earnings, compared with 13 times for the pharmaceutical industry and 22 times for the S&P 500 overall.
Stocks are usually cheap for a reason. Bristol Myers has been out of favor with investors for five years. Lately the concerns have included lackluster growth, largely because Bristol's blockbuster cancer drug Opdivo is losing market share to Merck's Keytruda. The company is also digesting its huge merger with Celgene. The move was costly and required divestiture of one of Celgene's top growth drugs to satisfy antitrust regulators. Celgene's Revlimid became the combined company's top-selling drug after the merger, but it will face potential generic competition starting in 2022.
Those concerns are priced into the stock, but investors will likely warm up to it again over the next year or two as the company's investments in its pipeline start paying off. The company has launched four new medicines in recent months and has some important approvals on the horizon. Drugs with multibillion-dollar potential include mavacamten, a cardiovascular drug that Bristol got in its recent acquisition of MyoKardia, and deucravacitinib. The latter recently passed a phase 3 trial with flying colors. It could be an immunology blockbuster for treating psoriasis, psoriatic arthritis, lupus, and Crohn's disease.
Bristol should start seeing operating efficiencies improve as the combined company takes out cost. Indeed, analysts expect 2021 earnings to jump 17% from their expectations for this year. The stock yields 3%. It's a good choice for investors looking for dividend stocks with growing payouts.
