Over the past 10 years, pharmaceutical stocks have consistently outperformed major indices, with the Dow Jones US Pharmaceutical & Biotechnology Index up nearly 202% over that time period compared to the Dow Jones Industrial Average's 160% return. And even better than regular pharma stocks are sector players that are trading at dirt-cheap valuations, as they usually have the greatest potential for capital appreciation.
The ongoing coronavirus pandemic has caused a select few blue-chip pharma companies to fall way below their intrinsic values, even with all the bad news priced in. Let's take a look at which companies are in that space today and why they're among the stocks to buy in October.
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1. Bayer
At first glance, nothing seems to have gone right for Bayer (BAYR.Y 1.45%) this year. Due to reduced consumption, competition among the growth of major crops, and plunging currencies in grower nations, Bayer's crop sciences segment has taken an especially hard hit. Compounding this development is that many patients are delaying elective treatment of their conditions -- which would use Bayer's products -- because of fear of the coronavirus.
If that wasn't enough, the company is also in the process of settling more than 125,000 lawsuits alleging its Roundup weed killer causes cancer after prolonged exposure. This has landed the company with a staggering legal bill of $12 billion.
Fortunately, the healthcare conglomerate is taking dramatic measures to restructure, with a plan to save 1.5 billion euros per year in operating expenses until 2024. For 2021, the company still expects to generate 43 billion euros in sales and, at most, 6.60 euros in earnings per share (EPS), representing no change to a slight decline from this year's results.
That means Bayer is trading for just 15 times price-to-earnings (P/E) and 1.1 times price-to-sales (P/S), which seems absurdly low, considering the company pays between 30% to 40% of its profits each year to shareholders. Bayer's dividend yield now stands at a whopping 6.2%, well above the S&P 500 average of 2%.
If that wasn't enough, Bayer also has 26 experimental therapies in phase 1 testing, 14 drugs in phase 2 trials, and nine programs in phase 3 clinical studies. Now may be a great time to buy Bayer stock on the dip, as management expects a return to growth for its pharmaceutical segments by the end of 2021.
2. Biogen
Biogen's (BIIB -1.13%) financial outlook appears rather negative, as the company's multiple sclerosis drug Tecfidera is already facing generic competition amid an ongoing legal battle over the validity of its patent protection. Last year, Tecfidera accounted for $4.4 billion of Biogen's $14.4 billion in revenue.And that's not all: The company's second most profitable neuromuscular drug, Spinraza, is facing branded competition, putting $495 million per quarter of revenue at risk of pricing pressures.
But despite all the company's ominous developments, investors can breathe a sigh of relief knowing that the stock price already reflects these risk factors. For the entirety of 2020, Biogen still expects to generate up to $14.2 billion in revenue and $34 in EPS, which is about the same as the $14.4 billion in sales and $31.42 in EPS it brought in last year. That's a lot for a company with a market cap of $45.4 billion -- and it means Biogen is trading for a P/S ratio of just 3.4 and a P/E of 8.4.
Even if we assume competition with Tecfidera and Spinraza will slice Biogen's revenue and earnings by one-third, the company will still be trading for 5.1 times sales and 12.6 times profits. As investors can see, the bad news has arguably had too much of a drag on the stock price already; its valuation is cheap even in a worst-outcome scenario. Moreover, Biogen also has $5.3 billion in cash and marketable securities on its balance sheet to cushion any unexpected expenses. As icing on the cake, in November, a panel of specialists from the U.S. Food and Drug Administration (FDA) will be reviewing whether Biogen's aducanumab can be marketed to treat Alzheimer's disease.
