Pharma Stocks Are Bleeding. But These 2 Look Like Bargains.

For stock pickers willing to endure some short-term pain, the selloff does open the door for some potential bargains. Still, the sector is facing a pile-up of difficult trends.

The latest no good, very bad earnings season started with
Johnson & Johnson
(ticker: JNJ), which on Oct. 17 raised its full-year guidance and announced third quarter earnings that beat Wall Street estimates. Shares fell 0.9% anyhow, eventually sliding to a 52-week low on October 27.

It got worse from there.
Bristol-Myers Squibb
(BMY) shares fell 6.4% on Oct. 26 despite an earnings beat. On Oct. 27,
AbbVie
(ABBV) shares fell 4.3% after its earnings beat, and
Sanofi’s
(SNY) American depositary receipt plummeted a heart-pounding 19.1% on earnings.

Last week,
Amgen
(AMGN),
GSK
(
GSK
), and
Moderna
(MRNA) all fell after reporting earnings.
Pfizer
(PFE) shares closed up 0.3% when it reported earnings on Tuesday, but not before setting a new 52-week low intraday.

The selloffs came at a low ebb in investor sentiment around big pharma, with the exception of the two companies behind the new anti-obesity drugs,
Eli Lilly
(LLY) and Novo Nordisk (NVO). While Lilly’s shares are up 55.8% this year, and Novo’s are up 45.5%, the rest of the sector is trailing the market. In a year when the S&P 500 is up 13.5%,
Pfizer
is down 39%, Bristol Myers down 26.7%,
Merck
(MRK) down 6.6%, and
Johnson & Johnson
down14.3%.

Some of what ails the drugmakers may just be the relative strength of Lilly and Novo. Excitement over the weight loss drugs from the two companies has drawn an enormous amount of investor excitement and capital. All that buying might be sucking up all the space investors have in their portfolios for pharma stocks.

At the same time, the challenges facing the sector are clear: Drugmakers have been unable to disrupt the rollout of a new program that will allow Medicare to negotiate the prices of some high-price drugs, U.S. antitrust regulators are taking a dim view of pharma mergers, and steep patent cliffs are coming for many of the companies. Meanwhile, the dividend yields that once made the drug stocks an attractive haven are no longer compelling.

Despite all those headwinds, shares of a few of the drugmakers still seem cheap, especially after the recent selloffs. One is Merck. “We see MRK’s diversified pipeline/portfolio…as being increasingly well-equipped with commercial opportunities with the potential to generate sustained growth over the intermediate and longer term,” Goldman Sachs analyst Chris Shibutani wrote in an October 27 note. Shibutani has a Buy rating and a $131 target price on the stock.

Merck shares trade at 14 times earnings expected over the next 12 months, in line with its 5-year average, according to
FactSet.
The company has made a number of smart deals in recent years, including the $11.5 billion acquisition of Acceleron Pharma. Acceleron’s heart drug sotatercept has since performed well in clinical trials, and is likely to be a blockbuster.

The U.K. drugmaker AstraZeneca (AZN), too, remains an analyst darling. Of the 31 analysts tracked by FactSet who cover the stock, 27 rate it a Buy or Overweight. AstraZeneca’s ADR is down 5.7% this year, and trades at 15.6 times earnings expected over the next 12 months, according to FactSet, well below its five-year average of 19.5 times earnings.

Analysts are enthusiastic about an AstraZeneca lung and breast cancer treatment under development known as datopotamab deruxtecan, which J.P. Morgan analyst James Gordon wrote on Nov. 2 could bring in revenues of $12 billion a year at peak. There’s also excitement about Enhertu, another AstraZeneca treatment, which Gordon says could bring $14 billion a year at peak.

AstraZeneca reports earnings this Thursday.

Write to Josh Nathan-Kazis at [email protected]