Wall Street doesn't always get it right. As much as analysts would like to be infallible, sometimes their predictions for stocks aren't correct. Ditto for investors. Sentiment can change, sometimes overnight.
So we asked three of our healthcare experts for their top pharma stocks that Wall Street might be getting incorrect. Read on to see why they think Wall Street might be wrong about Pfizer (NYSE:PFE), Bristol-Myers Squibb (NYSE:BMY), and Eli Lilly (NYSE:LLY).
Todd Campbell: Over the past three months, analysts have lowered their 2015 earnings estimates for Pfizer; however, long-term investors may be better off looking beyond this short term pessimism toward the company's potential path back to growth.
As of January, Pfizer had 86 drugs in its pipeline, including 29 that are either in phase 3 trials or in registration with the FDA. Included in that list are key cancer drugs like the recently approved Ibrance and a PD-L1 drug similar to Bristol-Myers Squibb's Opdivo, as well as a PCSK9 targeting cholesterol-busting medicine. Additionally, Pfizer's recent deal to buy Hospira (UNKNOWN:HSP.DL) gives it an enviable, market-leading position in biosimilars -- the generic alternatives to megablockbuster biologics therapies such as Humira and Rituxan.
Admittedly, Pfizer's not out of the woods yet. It still needs to get these drugs to market and then, it will need to edge out competitors. However, Pfizer's irons in the fire could suggest that this is one situation where paying too much attention to analysts' earnings projections may not be the right move.
George Budwell: Wall Street's outlook for Bristol-Myers Squibb has turned decidedly bullish within the last three months. Specifically, 53% of analysts covering the stock rated it a "Strong Buy," while only one rated it a "Sell."
The Street's view seems to reflect, at least in part, Bristol's success in gaining two regulatory approvals for its PD-1 inhibitor Opdivo recently, in the realms of advanced melanoma and squamous nonsmall cell lung cancer. What's key to understand is that immunotherapies like Opdivo are expected to generate nearly $35 billion in sales by 2020, and become a standard part of cancer care moving forward.
Having said that, I think there are some compelling reasons to be cautious with this top healthcare stock. Chief among them, Bristol's share price has garnered a staggering premium of late, presumably because of its foray into the red hot area of immuno-oncology. At current levels, for example, Bristol's shares are trading at a 12-month, trailing P/E ratio of 56 and a forward P/E ratio hovering around 30. Both of these metrics are substantially higher than Bristol's immediate peers within big pharma, as well as the averages among healthcare stocks in general.
Although Opdivo will probably become a megablockbuster one day, I believe Bristol's share price has gotten far ahead of the drug's clinical, regulatory, and commercial progress to date, suggesting that Wall Street could be markedly wrong about this stock in the near term.
Brian Orelli: Five analysts have recommended Eli Lilly as a strong buy, four recommend it as a buy, and 11 have a hold rating on the big pharma according to Thompson/First Call. With more holds than buys, they're collectively not exactly giving a ringing endorsement for Eli Lilly.
But I think that's still too positive.
Eli Lilly's shares have been on quite the run lately, up 25% over the last year. But it isn't really clear what all the excitement is about. Revenue in 2014 declined 15% year over year. Adjusted earnings per share fell 33%.
You could argue that much of the decline was expected as Cymbalta and Evista faced generic competition in the U.S., but Eli Lilly is still trading at decade-long highs. That's a little more than a relief rally.
This year Eli Lilly is guiding for adjusted earnings in the $3.10 to $3.20 per share range. While that's an increase over 2014 levels, it won't reach the $4.15 per share Eli Lilly earned in 2013 nor the $3.39 per share Eli Lilly earned in 2012 when shares were quite a bit cheaper.
Until Eli Lilly can show that it can develop new drugs, growing revenue organically, most investors would be best off staying away unless shares drop to a more reasonable level.
Brian Orelli has no position in any stocks mentioned. George Budwell has no position in any stocks mentioned. Todd Campbell has no position in any stocks mentioned. 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.