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3 Pharmaceutical Stocks That Are Too Cheap to Ignore

Motley Fool - Sat Sep 9, 2023

On average, healthcare stocks haven't kept up with the gains made by the rest of the market this year. While the S&P 500 index is up by more than 17% year to date, that sector's stocks are down by nearly 3%. That trend, though, created some great opportunities to get in on solid value stocks that are underpriced and offer solid dividends.

Viatris(NASDAQ: VTRS), GSK(NYSE: GSK), and Organon(NYSE: OGN) are too inexpensive to pass up at this point. All three pharmaceutical stocks trade at under 7 times earnings and have forward price-to-earnings ratios of less than 10.

GSK PE Ratio Chart

GSK PE Ratio data by YCharts.

Let's look at some other reasons these three pharmaceutical stocks are too cheap to ignore.

1. Viatris is finding a path for growth

Viatris, which was formed in 2020 via the merger of Mylan and the Upjohn division of Pfizer, is down by more than 8% so far this year. The company's revenue, built on legacy branded drugs and generics, has been slipping, but Viatris remains profitable and has several new biosimilar products that (in time) are expected to reverse that revenue slide.

The company's biggest launch this year was Breyna, the first generic version of AstraZeneca's Symbicort (used to treat asthma and chronic obstructive pulmonary disease) approved by the Food and Drug Administration (FDA). On Tuesday, the company received tentative approval from the FDA for its abacavir/dolutegravir/lamivudine triple therapy, its biosimilar which will be used as a treatment for pediatric patients with HIV-1.

Viatris reported second-quarter revenue of $3.91 billion, down 5% year over year, but up 5% sequentially. That total included $124 million in new product revenue, and the company said it is on track for $500 million in new product revenue this year. Earnings for the quarter were $0.22 per share, down from $0.26 per share in Q2 2022, but up from $0.19 per share in Q1 2023.

Viatris investors can afford to be patient as they wait for growth to return thanks to a generous dividend that at the current share price yields around 4.7%. The company boosted its quarterly payout by 9% last year to $0.12 per share.

2. GSK is showing steady growth

Shares of GSK (formerly GlaxoSmithKline) are down by more than 2% so far this year, and the stock is trading at a price-to-earnings ratio of slightly above 4. That's incredibly low considering that the company is growing revenue even as its COVID-19-related sales erode.

In the second quarter, the company reported revenue of $8.9 billion, up 4%, year over year, but if COVID-19 sales were taken out of the picture, revenue would have been up 11%. GSK also reported net income of $2 billion, up 98%, year over year.

The company is seeing strong growth from its recently approved shingles vaccine, Shingrix, as well as from the new respiratory syncytial virus vaccine Arexvy. It also just got FDA approval on July 31 for Jemperli to be used as a front-line combination therapy with chemotherapy to treat endometrial cancer. The company is awaiting the FDA's decision on its myelofibrosis therapy candidate momelotinib.

The company recently raised its quarterly dividend by 5% to $0.36, which at the current share price gives it a yield of just under 4%.

3. Organon seeing gains from women's health therapies, biosimilars

Organon, like Viatris, is a spinoff that hasn't exactly caught on with investors yet, despite its financial strength. Organon, which was carved out of Merck in 2021, has a big portfolio of biosimilars, including Hadlima, a biosimilar to AbbVie's anti-inflammatory blockbuster Humira that Organon and partner Samsung Bioepis launched at the end of July. Hadlima, priced at 85% less than Humira, is expected to have strong sales.

Most of the company's pipeline, though, is made of early-stage candidates. However, that also means it has the potential for solid long-term growth.

The stock is down more than 28% this year and trading at just under 7 times earnings. In the second quarter, Organon reported revenue of $1.61 billion, up 1% year over year and 4% sequentially. It also reported net income of $242 million, up 3% year over year and 36.7% sequentially.

One driver of the company's growth was its portfolio of women's health products, sales of which were up 8% year over year, led by a 12% sales gain by reversible contraceptive Nexplanon. Additionally, sales of Organon's biosimilars were up 14% over the same period last year. The biosimilar sales surge was led by Renflexix, a biosimilar to Remicade, which is used to treat autoimmune disorders and sold by Johnson & Johnson subsidiary Janssen.

Organon also raised its guidance. Management now expects yearly revenue to be between $6.25 billion and $6.45 billion, compared to $6.2 billion last year.

Organon also has the best dividend yield of these three companies at around 5.6%, thanks to a quarterly dividend of $0.28 per share, though its payout has held steady at that level for several years.

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Jim Halley has positions in AbbVie, GSK, Johnson & Johnson, Pfizer, and Viatris. The Motley Fool has positions in and recommends Merck and Pfizer. The Motley Fool recommends GSK, Johnson & Johnson, and Viatris. The Motley Fool has a disclosure policy.

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