Pharmaceutical companies can be great long-term investments. This is because the demand for medicines and vaccines is steadily growing along with an aging global population.
Because of the major industry risk that comes with patent expirations, investors need to be sure that they are picking pharmaceutical companies with strong product pipelines. These companies can replace their revenue loss from patent expirations with new products and keep their top line and profits growing over time.
Here are two big pharma stocks with robust product portfolios and pipelines for long-term income investors to consider for their portfolios.
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1. Pfizer: Poised to thrive beyond the COVID-19 pandemic
Pfizer's (PFE -0.60%) $231 billion market capitalization earns it the distinction of being the fifth-largest drugmaker in the world. The company's massive streams of revenue from its COVID-19 vaccine (co-owned with BioNTech) named Comirnaty and the anti-viral pill labeled Paxlovid will be significantly lower in 2023 as demand cools off. That's why Pfizer anticipates that its revenue will drop from $100.3 billion in 2022 to around $69 billion in 2023.
But beyond this year, the company's future is bright. That is because Pfizer had 110 indications in clinical development as of Jan. 31. The cancer drug candidate called elranatamab is one such medicine that could generate nearly $3 billion in annual peak sales for the drugmaker. On top of other candidates with blockbuster potential, like the company's respiratory syncytial virus vaccine, this should help Pfizer's business to recover sooner rather than later.
Income investors will be impressed by the stock's 4% dividend yield, which is well above the S&P 500 index's 1.7% yield. And yield-focused investors should also be pleased to learn that with the dividend payout ratio set to come in just below 49% in 2023, the dividend is quite sustainable.
The market may be down on Pfizer, but this negative attitude toward the stock doesn't jive with the underlying fundamentals of the business. This is why Pfizer is a bargain at a forward price-to-earnings (P/E) ratio of 10.9, which is far less than the drug manufacturer industry average forward P/E ratio of 13.9.
2. AstraZeneca: Tremendous growth prospects at a reasonable valuation
With its $217 billion market cap situating it just behind Pfizer, AstraZeneca (AZN -0.55%) is the sixth-biggest pharmaceutical company on the planet. The company boasted 14 different blockbuster medicines and vaccines (i.e., at least $1 billion in annual revenue) in 2022, which is how it generated $44.4 billion in revenue in 2022. AstraZeneca's robust product portfolio was led by the mega-blockbuster (e.g., at least $5 billion in annual revenue) lung cancer therapy termed Tagrisso and the type 2 diabetes/heart failure/chronic kidney disease drug known as Farxiga.
Investors seeking high growth from their investments will also be relieved to find out that AstraZeneca's pipeline appears to be healthy enough to keep revenue and earnings growing over the medium term. For context, the company had over 170 projects in its pipeline as of Feb. 9. This is why analysts believe that AstraZeneca's earnings will compound by 16.2% annually through the next five years. Putting this into perspective, that is more than double the drug manufacturer industry average annual earnings growth forecast of 6.9%.
But despite this remarkable growth potential, AstraZeneca's stock is attractively valued. The stock's forward P/E ratio of 16.3 is meaningfully higher than the drug manufacturer industry average forward P/E ratio. This is a well-deserved premium, in my opinion, however. And the cherry on top is that in addition to an above-average growth profile at a reasonable valuation, investors get a market-beating 2.1% dividend yield. This dividend is also well-covered by a payout ratio that will come in under 40% in 2023.
