The COVID-19 pandemic is still ongoing, but there is a real possibility that we could go back to some semblance of pre-coronavirus life sometime this year. The U.S. Food and Drug Administration (FDA) has granted Emergency Use Authorization to two vaccines for the SARS-CoV-2 virus, which causes COVID-19. If all goes well, much of the U.S. population could have access to these vaccines within the next six months (or so).
Drugmakers played an important role in the fight against COVID-19, and many of them benefited from these efforts. But for investors, it's essential to invest in companies that will perform well once the pandemic subsides. Merck (MRK 0.10%) and Pfizer (PFE -0.19%) are two pharma giants with a bright future regardless of what happens next. Read on to find out why both of these companies are worth investing in.
1. Merck
This pharma giant hasn't performed well over the past 12 months: The company's stock is down by 9.26%, compared with gains of 16.41% for the S&P 500. But Merck's poor showing over the past year also means its stock is currently trading at relatively attractive levels. The company's forward price-to-earnings (P/E) ratio is 11.63, compared with a forward P/E of 25.35 for the S&P 500.
Meanwhile, Merck's price-to-earnings growth (PEG) ratio is 0.68 -- anything less than 1 is generally considered undervalued. The coronavirus outbreak and the ensuing stay-at-home orders led to reduced access to healthcare products such as vaccines and medicines, which negatively impacted Merck's business. However, there are excellent reasons to think its performance will improve as the world progressively shifts back to something resembling pre-pandemic days.
Arguably the most important is the company's Keytruda, a drug approved to treat various types of cancer. During its fiscal year 2020, which ended on Dec. 31, Merck's sales were up a meager 2% year over year to $48 billion. However, Keytruda sales jumped by 30% year over year to $14.4 billion. And the cancer medicine still has a bright future ahead; it's currently undergoing more than a dozen phase 3 clinical trials, and it should be able to add at least a handful of indications within another couple of years or so.
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Research firm Evaluate Pharma projects that Keytruda will be the world's best-selling drug by 2024. And Merck is working on many other programs, including 31 in phase 2 trials and 25 in phase 3. These will help the company enrich its lineup even beyond Keytruda. Merck's animal health business, which develops and markets veterinary pharmaceutical products, is also performing well. Last year, sales from this segment increased by 7% year over year to $4.7 billion.
During the company's fourth-quarter earnings call, CFO Rob Davis said the growth of the animal health segment is "best-in-class." This market is projected to expand at a good clip in the coming years, and it will continue to be an important key growth driver for Merck. Overall, Merck looks like a solid healthcare stock to bet on moving forward thanks to its oncology and animal health businesses. The company's shares may not remain on the cheap side for that much longer.
2. Pfizer
Pfizer has been grabbing scores of headlines thanks to its efforts to develop a vaccine for COVID-19 in collaboration with BioNTech. These efforts have, thus far, been successful: The company's candidate was the first to receive Emergency Use Authorization from the FDA. Although Pfizer will have to share the spoils with BioNTech, this vaccine will have a measurable impact on its top line.
But there are other reasons to consider adding shares of Pfizer to your portfolio. In November, the pharma giant spun off its off-patent medicine unit, Upjohn, to Mylan. The combined entity became a brand new company called Viatris, which started trading on the market on Nov. 17.
Why was this move important? Upjohn was becoming a serious drag on Pfizer's top-line growth. During the nine-month period ending Sept. 30, revenue from Upjohn dropped by 30% year over year to $5.9 billion. The decline was due to lower sales volume caused by competitive pressure for such products as pain medicine Lyrica.
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Meanwhile, sales from its biopharma segment rose by 6% to $30 billion, despite some headwinds caused by the pandemic. For the full fiscal year 2020, which ended on Dec. 31, Pfizer's biopharma revenue jumped by 7% year over year to $41.9 billion. Moving forward, Pfizer will be able to focus on this better-performing business.
One of the company's best-selling drugs is anticoagulant Eliquis, with worldwide sales for fiscal 2020 of $4.9 billion, a 17% increase over 2019. Then there is cancer drug Ibrance, which posted revenue for the same period of roughly $5.4 billion, a 9% year-over-year increase. Rheumatoid arthritis (RA) treatment Xeljanz is also no slouch; its $2.4 billion in revenue last year also represented a 9% increase over 2019.
It is worth noting that Pfizer recently reported results from a post-marketing study for Xeljanz. The study compared the safety profile of Xeljanz versus that of TNF inhibitors (drugs such as AbbVie's Humira that treat autoimmune disorders) on RA patients who were at least 50 and had at least one additional cardiovascular risk factor. The data showed that patients on Xeljanz had higher rates of cardiovascular events and malignancies.
No doubt this was a blow to Pfizer, but in my view, the company's prospects remain more or less intact. The FDA might opt to put more restrictions on the drug, but Pfizer can count on its coronavirus vaccine to make up some of the revenue it would lose as a result. Also, the company has more than 90 programs it is currently working on (including 24 phase 3 studies), and some of them are bound to strengthen its lineup.
Pfizer's forward P/E is currently a respectable 10.33, while its PEG is 0.90, making its stock reasonably valued. While it has underperformed the broader market of late, Pfizer's COVID-19 vaccine and its biopharma business have set it up for long-term success, leaving the company well positioned to turn its recent stock performance around -- particularly for investors willing to be patient.
