Political shifts have swept through the healthcare sector, and pharmaceutical companies appear to be bearing the brunt of these changes. Leading firms such as Pfizer ( PFE -1.68%), Merck ( MRK -2.02%), and Bristol Myers Squibb ( BMY -2.10%) have experienced declines in their share prices, resulting in higher yields.
For investors who prefer to go against the crowd, the pharmaceutical sector offers intriguing opportunities to find undervalued stocks. If you have $1,000 to invest, one particular pharmaceutical stock stands out as a compelling option.
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What is the role of pharmaceutical companies?
At a broad level, companies like Pfizer, Merck, and Bristol Myers Squibb operate in much the same way. They search for promising drug candidates, develop these drugs, secure regulatory approval for their use, and ultimately bring them to market. While this is a simplified overview, the actual process is highly complex, lengthy, and costly.
Because discovering new medicines is so challenging and vital to healthcare, pharmaceutical firms are granted a temporary exclusive right to sell their new drugs. However, once a drug’s patent expires, competitors can introduce generic alternatives, often leading to a significant drop in sales for the original developer—a phenomenon known as the patent cliff. Navigating these patent cliffs is a routine part of the business for drug makers.
Interacting with government agencies is also standard practice, though currently, the regulatory environment in Washington D.C. is less favorable for the pharmaceutical sector, especially for vaccine producers. This negative sentiment has also reached consumers. While this presents an unusual challenge, it is one that most pharmaceutical companies are facing, so it is not a unique obstacle for any single firm.
PFE data from YCharts
Why consider Pfizer, Merck, and Bristol Myers Squibb?
Pfizer, Merck, and Bristol Myers Squibb are among the most established and recognized names in the pharmaceutical world. They have extensive experience handling patent cliffs, regulatory challenges, and the unpredictable nature of research and development. It’s very likely that all three will weather the current downturn in the industry. However, their share prices have dropped sharply from recent peaks—Pfizer by 60%, and both Merck and Bristol Myers Squibb by around 40%—which has pushed their dividend yields to appealing levels.
As a result, investors seeking dividends may find all three of these stocks appealing. But if you’re considering a contrarian investment in just one, which should you choose? For dividend-focused investors, a company’s dividend history is a good place to start. Pfizer is quickly eliminated from consideration due to a dividend reduction in 2009, which was tied to its $68 billion acquisition of Wyeth—so the cut wasn’t entirely negative.
PFE Dividend data from YCharts
Nevertheless, for those who prioritize steady dividends, Merck and Bristol Myers Squibb have demonstrated more reliable records. That narrows the choice to these two. Dividend seekers may be drawn to Bristol Myers Squibb’s 5.3% yield, which is higher than Merck’s 4%. While this is understandable, Merck appears more attractive when considering valuation.
Merck’s price-to-sales (P/S), price-to-earnings (P/E), and price-to-book (P/B) ratios are all well below their respective five-year averages. In contrast, Bristol Myers Squibb’s P/S ratio is under its five-year average, but recent losses make its P/E less meaningful, and its P/B ratio is above the long-term average. Additionally, Merck’s current P/E is lower than that of Bristol Myers Squibb, further suggesting that Merck offers better value.
Overall, Merck is likely the best starting point for those researching undervalued pharmaceutical stocks.
Merck’s challenges
Among high-yield options like Pfizer, Bristol Myers Squibb, and Merck, the latter could be described as the least problematic choice. For instance, Merck faces a significant patent cliff with its key drug Keytruda, though certain factors may soften the impact. International patents for Keytruda last into the 2030s, and a different delivery method is protected until nearly 2040. Another concern is the slow adoption of Merck’s HPV vaccine in important markets.
In summary, Merck is not a guaranteed winner compared to Pfizer or Bristol Myers Squibb. If you decide to invest, you must have confidence that Merck will manage its current challenges as effectively as it has in the past. However, if you understand the business and are prepared to monitor its progress, investing $1,000 could get you about 12 shares of this historically dependable dividend payer while its yield and valuation remain attractive.
