Despite a pandemic and a worldwide economic recession, U.S. stocks turned in a banner year in 2020. The iShares Nasdaq Biotechnology ETF, for instance, gained 25% last year thanks to a suite of hurricane-force tailwinds. For example, the U.S. Food and Drug Administration approved an astounding 53 novel drugs last year; an unusually large amount of money flowed into pharmaceutical research; and scores of high-dollar business development deals were consummated across the industry. Unfortunately, several of these key tailwinds are unlikely to roll over into 2021.
This year, therefore, biopharma investors may want to scale back on speculative growth stocks in the industry, and instead focus on value-oriented plays. Companies with attractive price-to-earnings ratios, strong free cash flows, and healthy dividends are wise bets in uncertain times, after all.
Which pharma stocks are the best value plays right now? AstraZeneca (AZN -1.55%) and Gilead Sciences (GILD -0.90%) are top-shelf drugmakers that haven't been getting much love from retail investors of late. As a result, these blue-chip dividend-paying stocks are trading at fairly cheap valuations. Here's a rundown on why value and biopharma investors alike may want to add both to their portfolios in 2021.
AstraZeneca: Better times ahead
AstraZeneca's share price performance was a huge disappointment for investors last year. Though the U.K.- and Switzerland-based drugmaker experienced a nice uptick in revenue due to an influx of new products and line extensions in the areas of oncology, diabetes, and respiratory diseases, its shares essentially traded sideways for the whole of 2020.
AstraZeneca's stock underwhelmed -- relative to the broader biopharma industry -- for two key reasons. First, in its late-stage clinical trial, the COVID-19 vaccine that the company developed in conjunction with the University of Oxford failed to demonstrate a level of efficacy quite as high as the mRNA jabs developed by Moderna and Pfizer/BioNTech. As such, this vaccine is unlikely to be a huge revenue generator for the company in 2021 and beyond. To be fair, though, AstraZeneca's brain trust warned investors beforehand that this vaccine was never intended to be a major moneymaker for it during the pandemic.
Secondly, AstraZeneca's decision to spend $39 billion to buy the rare disease drugmaker Alexion Pharmaceuticals wasn't a big hit with investors. The main reason was that it undoubtedly paid a steep premium to enter a niche where it historically hasn't had much of a footprint.
So why should investors circle back to this unloved pharma stock in 2021? Among big pharmaceuticals, it is highly likely to be one of the fastest-growing companies from both a top- and bottom-line perspective over the next decade. AstraZeneca's dividend -- which at current share prices offers a better-than-average yield -- should thus be secure for the foreseeable future. Last but certainly not least, the company's shares are trading at under 10 times anticipated 2023 earnings right now, which is a dirt-cheap valuation for a blue-chip pharma stock.
Gilead: A slow-motion turnaround
Gilead Sciences has been a factory of sadness for investors for a full five years at this point. The biotech's inability to find sources of revenue to offset the sales declines of its hepatitis C drugs has been the main culprit. Despite numerous attempts to expand into other high-value therapeutic areas such as non-alcoholic steatohepatitis, immunology, and oncology, the California-based biotech hasn't had much luck. In fact, Gilead's bread-and-butter HIV drug franchise has arguably been its singular saving grace during this turbulent period.
Gilead appears to be nearing an inflection point, however, thanks to its decisions to spend a whopping $26 billion on two major acquisitions in oncology last year. It laid out $21 billion to buy Immunomedics for its FDA-approved metastatic triple-negative breast cancer treatment Trodelvy, and $4.9 billion on the CD47 blockade front-runner Forty-Seven. Gilead could thus end up with three cutting-edge cancer franchises by 2023 (when including the treatments held by its Kite Pharma subsidiary).
Why buy this large-cap biotech stock now? Although Gilead will likely have a down year on the revenue front in 2020 due to an anticipated drop in sales of its COVID-19 treatment Veklury (remdesivir), the biotech's shares are already trading at a paltry 8.8 times forward earnings. Moreover, Gilead's dividend presently offers a juicy 4.5% yield. So, with a turnaround not that far off in the future, there are solid reasons to snap up this beaten-down biotech stock to start the new year.