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If you want to get a good value when you invest in big pharma, it’s necessary to take a look at quality companies that are going through a rough patch. Given the long product development times in the industry, with most drugs taking seven years or more to launch after entering clinical trials, periods of uncertainty can potentially last a good while.

But good things tend to come to those who can wait. With that in mind, let’s examine two pharma stocks that are incredibly cheap and which are worth buying right now, assuming you are willing to patiently let their long-term strategic plans unfold over the coming years.

1. Pfizer

Pfizer (NYSE: PFE) is a pharmaceutical stock that needs no introduction — or perhaps it’s more accurate to say that it needed no introduction during its recent heyday of selling coronavirus vaccines and antivirals, which is over.

In 2022, it brought in more than $100 billion in revenue from sales of those anti-coronavirus medicines. Today, Pfizer looks like it’s struggling, even though its extensive pipeline with 33 late-stage clinical programs, recent major acquisitions, and ambitious plans for expanding through 2030 are potentially powerful drivers of its future growth. Total returns from its stock has fallen 20% over the last three years. Last year, it marked a couple of quarters where it reported operating losses instead of profits, while its trailing-12-month revenue fell to $55 billion.

There are a couple of valuation factors supporting the idea that Pfizer’s stock is undervalued, starting with its price-to-sales (P/S) ratio of 3. Its price-to-free-cash-flow (P/FCF) ratio is 34, which compares favorably to other big pharma players like Novo Nordisk that are starting to look a little bit frothy, with P/FCF multiples near 55.

Brighter days are ahead for Pfizer, which supports the idea of buying its stock at its current valuation.

It’s implementing a manufacturing cost reduction campaign to save as much as $1.5 billion in expenses by the start of 2028, on top of another initiative aiming to reduce expenses by $4 billion by the end of this year. Management is signaling that in the near future, it’ll be hitting the gas on both reinvestment in internal research and development (R&D) activities as well as returning capital to shareholders.

And that’ll likely occur around the same time as its newly acquired oncology drug business is launching and starting to drive growth, which could be a potent cocktail for the value of its stock to say the least.

2. Merck

Much like Pfizer, Merck (NYSE: MRK) has had a couple of unprofitable quarters on an operational basis recently, though it also has more than 30 programs in phase 3 clinical trials, at least some of which will yield it more revenue over the next few years.

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More importantly than its recent hiccups, however, is the looming patent expiry of its blockbuster cancer drug, Keytruda, which lapses in 2028. Sales of Keytruda brought in more than $7 billion out of the pharma’s total haul of around $16 billion in the second quarter, so it’s a major pillar supporting the top line. While there are a handful of programs pertaining to expanding the approved indications of the drug, which will likely keep earnings growing for a long time to come, the uncertainty of how Merck will continue to grow rather than merely tread water after generics steal its market share with Keytruda is doubtlessly a factor keeping its valuation down.

Merck’s P/S multiple is roughly 4, and its P/FCF is 21. That makes its valuation a bit pricier than Pfizer’s per dollar of revenue, but significantly cheaper per dollar of free cash flow. In other words, it’s cheap, but not so cheap that you’d find it neglected in the bargain bin.

Investment in R&D continues to be the top priority for the company’s capital allocation, followed by capital expenditure and dividends paid. Share repurchases are the very bottom of the priority list, which could be an ancillary reason why many investors are avoiding the stock despite its low valuation, Still, it doesn’t make sense for investors to bet against the ongoing output of Merck’s pipeline when management is explicitly saying that its dollars are going to keep going toward accelerating its R&D activity rather than curtailing it.

The only reason I think why the market’s been playing safe is because there isn’t yet a clear, long-term revenue stream that will replace Keytruda. However, with a solid investment in R&D, I also think Merck is perfectly capable of eventually bringing multiple drug candidates to the market that can not just replace its existing portfolio of medicines, but will far exceed expectations.

The business is also spending big to acquire promising programs from biotechs. On Oct. 1, it closed a deal worth $750 million to buy an early clinical-stage asset that could treat both relapsed or refractory non-Hodgkin’s lymphoma (NHL), as well as relapsed or refractory B-cell acute lymphocytic leukemia (ALL). And with over $11 billion in cash, equivalents, and short-term investments on hand, it has plenty of dry powder to hunt for promising growth opportunities.

So take advantage of this stock’s pricing while it’s cheap, because it probably won’t be this inexpensive for much longer.

Should you invest $1,000 in Pfizer right now?

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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Merck and Pfizer. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.

2 Incredibly Cheap Big Pharma Stocks to Buy Now was originally published by The Motley Fool

By Samuel Shen, Ankur Banerjee and Tom Westbrook

SHANGHAI/SINGAPORE (Reuters) – China’s highly anticipated announcement of financial stimulus plans on Saturday was big on intent but low on the measurable details that investors need to ratify their recent return to the world’s second-biggest stock market.

Saturday’s news conference by Finance Minister Lan Foan reiterated Beijing’s broad plans to revive the ailing economy, with promises made on significant increases to government debt and support for consumers and the property sector.

But for investors who were hoping to hear authorities spell out exactly how much the government will throw at the crisis, the briefing was disappointing.

“The strength of the announced fiscal stimulus plan is weaker than expected. There’s no timetable, no amount, no details of how the money will be spent,” said Huang Yan, investment manager at private fund company Shanghai QiuYang Capital Co in Shanghai.

Huang had hoped for more stimulus to boost consumption. Market analysts had been looking for a spending package between 2 trillion yuan to 10 trillion yuan ($283 billion to $1.4 trillion).

Reuters reported last month that China plans to issue special sovereign bonds worth about 2 trillion yuan this year as part of fresh fiscal stimulus. Bloomberg News reported China is considering the injection up to 1 trillion yuan of capital into its biggest state banks. Lan’s press conference did not give any specifics.

In the three weeks since the People’s Bank of China (PBOC) kicked off China’s most aggressive stimulus measures since the pandemic, the CSI300 Index has broken records for daily moves and is up 16% overall. Stocks have grown wobbly in recent sessions, though, as initial enthusiasm gave way to concerns about whether the policy support would be big enough to revive growth.

“If that’s what we have in terms of fiscal policies, the stock market bull run could run out of steam,” Huang said, referring to comments at Saturday’s press conference.

Heading into the briefing, some investors had braced for the finance minister to withhold actual spending details until China’s rubber-stamp parliament meets later this month.

Equally, investors also worried that mere interest rate cuts, which the PBOC has already announced, and a reluctance by the central government to spend will imperil the odds the world’s second-largest economy can hit its 5% growth target.

“Investors will need to be patient,” said HSBC’s chief Asia economist Fred Neumann, noting concrete numbers could come only by the end of this month when the standing committee of the National People’s Congress reviews and votes on specific proposals.

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Jason Bedford, former China analyst at Bridgewater and UBS, pointed to Lan’s pledge to recapitalise big state banks as indicating authorities expect to see a revival in demand for credit.

“But the only way the economy needs more credit is if you create credit demand which can only be done if you provide fiscal (support).”

HOW MUCH?

Investors have good reason to be circumspect about how much Beijing will spend. The slump in consumer confidence and the property sector is a by-product of the years-long drive by the Communist Party leadership to reduce debt and root out corruption.

Yet, the hope that authorities are serious to fix those issues has driven foreign investors and domestic retail money into stocks. The PBOC’s 500-billion-yuan swap facility to channel more cash into the stock market has helped.

The Shanghai Composite index is up 12% since the measures were first announced on Sept. 24, but property and tourism stocks are still dragging in a sign of some doubts around the extent of state support.

Global commodity markets from iron ore to other industrial metals and oil have also been volatile on hopes stimulus will stoke its sluggish demand.

“Potentially some event money might be disappointed and remove some bets on the headline numbers not meeting high expectations but the more important capital flows might be encouraged by continuing efforts to stabilise the economy and keep growth at appropriate levels,” said Matthew Haupt, portfolio manager at Wilson Asset Management in Sydney.

According to LSEG Lipper data, overseas China funds received a net $13.91 billion since Sept. 24, pumping up inflows so far in 2024 to $54.34 billion. Much of that money has gone into exchange-traded funds (ETFs), while mutual funds are still reporting net outflows of $11.77 billion for the year.

Bedford is hopeful of a revival in retail interest sustaining the stock market rally.

“We have a perfect storm of four factors at play,” he said, citing pent-up household savings and a lack of attractive alternatives to the stock market, an alignment of corporate and shareholder interests driving up buybacks and dividends, and central bank programmes offering leverage to corporates and institutions to invest in the stock market.

“A sustained rally driven by the China household has the foundations for success … we are early in this process and the risk is the possibility of flawed execution or not communicating things well. The structural story remains compelling though.”

($1 = 7.0666 Chinese yuan renminbi)

(Reporting by Ankur Banerjee, Tom Westbrook in Singapore, Samuel Shen in Shanghai, Gaurav Dogra in Bengaluru; Writing by Vidya Ranganathan; Editing by Kim Coghill)