With valuations growing across the stock market and the biopharma sector, it’s only natural for value-sensitive investors to be looking for bargains all the more intently. On average, the well-established leaders of the pharma industry, like Pfizer (NYSE: PFE) and Eli Lilly, (NYSE: LLY) aren’t the first place to find an undervalued gem.
Still, that doesn’t mean those two are equal in terms of the bang investors might get for their buck. So let’s evaluate both of these players to determine which one is the better bargain, and why.
Pfizer’s valuation looks like it’s near rock bottom
It’s easy to spin a narrative about Pfizer being in shambles compared to its former glory.
Its trailing-12-month operating income is a mere $1.3 billion, down by a shocking 94% from just three years ago. The most obvious reason for the decline is the company’s coronavirus vaccine and coronavirus antiviral revenue collapsing sharply, amid very underwhelming sales of product launches that management was counting on to drive growth, like its respiratory syncytial virus (RSV) vaccine.
Presently, Pfizer’s enterprise value-to-revenue (EV/R) ratio is 4.1, and its price-to-book (P/B) multiple is 1.9. In short, those two metrics suggest that investors are taking a rather pessimistic view about the future value of the company’s assets and shares in light of the share price and revenue it has today, and the debt it’s carrying. Let’s unpack this a little bit more to see why that might be the case, and whether it’s likely to be an accurate assessment or not.
On average, Wall Street analysts are estimating that Pfizer’s recent instances of unprofitability are, in the long term, going to be blips, with the consensus calling for earnings per share (EPS) growth of around 9.6% annually. But they also see this year as well as the next couple of years being doldrums, with relatively weak growth.
Pfizer probably has some operational inefficiencies that could be ironed out; an activist investor group called Starboard Value took a stake in Pfizer worth $1 billion in early October. Management is already pursuing cost cuts that could reduce annual expenses by around $4 billion by the end of 2024.
Furthermore, this company is far from being rudderless. Its long-term strategy calls for a combination of new research and development (R&D), and business development activity to bolster its top line dramatically between now and 2030 by focusing on segments like cancer drugs. Recent acquisitions of major oncology biotechs like Seagen and smaller collaboration deals will serve those goals efficiently, though not immediately.
So, with the grand plan already unfolding, it’s likely a matter of time until Pfizer returns to being a consistent performer. In that light, its shares look quite undervalued today.
Eli Lilly’s stock is priced for the growth it’s on track to realize
In contrast to Pfizer, it’s very straightforward to build an investment thesis for Eli Lilly on the basis of its growth rather than its favorable valuation. In the last three years, its trailing-12-month normalized diluted EPS climbed by 60%, reaching $12.13. And right now, at least on the surface, it has the look of a business that can continue to expand rapidly for years and years.
The main drivers of its growth are its therapies for type 2 diabetes and obesity, which are called Mounjaro and Zepbound, respectively. Weight loss drugs are all the rage right now, and Lilly’s offering became a blockbuster drug overnight, with Zepbound bringing in more than $1.2 billion in sales during the second quarter alone. Until very recently, it couldn’t even manufacture enough Zepbound to meet demand in the U.S., prompting it to make billions in investments in manufacturing capacity.
What’s more, its pipeline is jam-packed with candidates in mid-stage and late-stage development that could be even better — and cardiometabolic drugs aren’t its only segment, either.
In terms of its valuation metrics, Lilly’s EV/R ratio is 21.8, whereas its P/B multiple is 60.7, so it’s obviously vastly pricier than Pfizer’s stock. One additional metric to note is its price-to-earnings (P/E) multiple, which is very high at 112.7 compared to the pharma industry’s average P/E of 28.5; Pfizer’s recent unprofitable quarters make it unsuitable to analyze with this ratio.
There’s reason to believe that Eli Lilly could justify its pricey valuation. The average estimate from Wall Street analysts is that its EPS will grow for around 42% on an annual basis for the long term, though it’s important to recognize that “long term” does not mean “forever.” With such growth projected, it makes sense why investors would be flocking to buy the stock.
Which is the better bargain?
Between these two options, at the moment Pfizer is the better bargain, though it’s also the riskier option because it isn’t currently ascendant like Eli Lilly is. As a long-established leader in the pharma industry, the odds are in its favor to successfully turn around its flagging profitability via a combination of price cuts and successes with its pipeline programs.
Given that its stock is quite undervalued, assuming it does actually make a turnaround, eventually the market will recognize that it should be priced higher, and it won’t be a bargain anymore.
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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Pfizer. The Motley Fool has a disclosure policy.
Which Pharma Stock Is the Better Bargain Buy: Pfizer or Eli Lilly? was originally published by The Motley Fool
