5 Affordable Biopharma Stocks With Growth Potential

For investors looking for value among mature, larger-cap biopharmaceutical companies, the search can be tough. Shares of stalwarts like Eli Lilly (LLY) and Johnson & Johnson (JNJ) have climbed in recent months, with Lilly up 21.1% so far in 2021, and Johnson & Johnson up 5%, while the S&P 500 Healthcare index is up just 2.1%.

In an effort to find the most affordable biopharmaceutical growth stocks in the S&P 500, Barron’s has once again sifted through the numbers to find the five stocks for which analysts expect the most growth, at the cheapest price.

To make our list, Barron’s looked at the 10 biopharma stocks in the S&P 500 for which analysts have the highest long-term earnings-per-share growth estimate, according to FactSet. Out of those stocks, we picked the five that trade at the lowest multiple of earnings expected over the next 12 months, also according to FactSet.

This is the same screen we ran back in July. And while many of the entries on the list remain the same, there are a few key changes.

As was the case in July, these are stocks with substantial growth potential, but, in some cases, with significant risks that are causing them to trade at a bit of a discount to their peers. Often, these are drug companies that rely heavily on a single product, or with a number of patents expiring in the next few years.

The new entrant in this edition of the screen is AbbVie (ABBV), which trades at 8.3 times earnings expected over the next 12 months—below its 5-year average of 10.4 times earnings. Analysts expect a long-term earnings-per-share growth rate of 13%. The stock is up 11% over the past 12 months, but down 2.6% so far this year. Analysts remain optimistic about the long-term prospects of the company, which bought the Botox-maker Allergan last year. Mizuho analyst Vamil Divan called AbbVie his top large-cap pick in the sector for this year. 

But one big worry remains: Humira, the AbbVie anti-inflammatory drug that has at times been the bestselling drug in the world, is aging. AbbVie will lose exclusive rights to market the drug in the U.S. in 2023. In 2020, the company sold $19.8 billion worth of Humira, out of $45.8 billion in total sales.

That patent cliff has depressed the valuation of the stock. But analysts remain optimistic: Of the 20 who cover the stock tracked by FactSet, 15 rate it a Buy or Overweight.

The other four companies that passed through the screen this round are repeats from July’s screen. The one with the highest expected long-term earnings-per-share growth rate, according to FactSet, is Alexion Pharmaceuticals (ALXN), at 18%. But that number is all but moot, given the news in December that AstraZeneca (AZN) will buy the company for $39 billion in cash and stock.

Alexion shares are up 52.5% over the past 12 months. The stock trades at 12 times earnings over the next 12 months, though, again, that figure is less relevant, given the acquisition plans. The deal values Alexion at $175 per share. Alexion recently traded at $156.45 per share. The deal is expected to close in the third quarter of this year. The stock is likely no longer trading on fundamentals, but rather on expectations surrounding the acquisition.

Also on the list are three big pharma firms: Bristol Myers Squibb (BMY), Merck (MRK), and Pfizer (PFE).

Pfizer trades at 10.9 times earnings expected over the next 12 months. Analysts have assigned a long-term growth rate of 9.3%, according to FactSet. Pfizer shares are relatively flat over the past year, even as the company introduced the first Covid-19 vaccine to be authorized in the U.S.

Despite the remarkable success of the company’s Covid-19 vaccine, which was developed in partnership with the German biotech BioNTech (BNTX), the company is headed toward a substantial patent cliff of its own. That is coming between 2026 and 2029, when the company loses exclusive rights to five major drugs.

Pfizer has adopted an entirely new corporate strategy in preparation for the patent cliff, refocusing on its science and its pipeline, and even adopting a new logo.

Bristol Myers stock, meanwhile, trades at 7.9 times earnings expected over the next 12 months, according to FactSet. Analysts assign it a long-term growth rate of 8%. Shares are down 4.1% so far this year, and 9.5% over the past 12 months. Bristol Myers faces patent trouble of its own—though the company says it’s on track to replace revenue lost to those patent expirations by 2030.

And finally, Merck, the vaccine stalwart that sells the blockbuster cancer drug Keytruda, trades at 11.5 times earnings. Analysts assign an 11% long term EPS growth rate, according to FactSet.

Merck, which recently announced a long-awaited CEO transition, is, like the other companies in the screen, approaching an intimidating patent cliff. Its drug Keytruda, which was responsible for $14.4 billion sales in 2020, could see its patent expire at the end of this decade. But the company’s outgoing CEO, Kenneth Frazier, played down the risk on a recent investor call.

“We understand the concerns that exist around KEYTRUDA, although I will tell you, I believe as we look at the [loss of exclusivity] for KEYTRUDA, we see it as not as big an issue as I think some investors may see it,” he said. “It is a big issue because the product is big. But as we continue to think about co-formulations and combinations, other routes of administration for KEYTRUDA, we see the opportunity to add benefit to patients that’s above what we can do with the current formulation of KEYTRUDA, which should also provide a longer patent life at the same time.”

Shares of Merck are down 7.7% so far this year, and 7.9% over the past 12 months.

Write to Josh Nathan-Kazis at [email protected]