The pharma industry has developed some real blockbusters between novel vaccines and weight loss drugs over the past few years. This has increasingly led investors to view pharma stocks as a promising growth industry after years of underperformance, but many are top pharma stocks to sell.
Pharma remains a tricky field where intense competition and limited product patent lives curtail profitability. Particularly in the case of these three pharma stocks to sell, investors have built up expectations substantially higher than warranted, given their outlooks today.
Eli Lilly (LLY)
Eli Lilly (NYSE:LLY) has been on a breathtaking run. LLY stock is now up 440% over the past five years.
The company has enjoyed tremendous success thanks to its drugs targeting diabetes and obesity. In recent years, this has been one of the biggest categories of emerging pharma products. Eli Lilly is at the forefront; it has grown its total revenues from $21 billion in 2018 to an estimated $34 billion for the full year of 2023.
That growth will likely continue as Lilly expands its role in the weight loss space. In November, for example, the FDA approved Zepbound (tirzepatide) for chronic weight management.
Investors are extrapolating that Eli Lilly’s growth will continue seemingly exponentially. However, the valuation has become detached from reality, with LLY stock up to over 100 times 2023 earnings. It’s not sustainable to have the stock price quintuple while revenues have less than doubled over the same period. LLY stock will fall sharply at the first sign of a weight loss drug category slowdown.
BioNTech SE (BNTX)
BioNTech SE (NASDAQ:BNTX) commercializes immunotherapies for cancer and other infectious diseases. Its pipeline largely consists of clinical-stage products targeting various types of cancer, including melanoma, prostate and head and neck cancers.
Until 2020, BioNTech was a small firm with virtually no operating revenues. However, the firm’s fortunes changed with the advent of the COVID-19 vaccine. BioNTech partnered with Pfizer (NYSE:PFE), and the two jointly developed one of the leading vaccines for that disease. BioNTech continues to generate revenues from each new formulation of that vaccine.
However, interest in COVID-19 vaccines has fallen sharply. To that point, BioNTech’s revenues plunged from $21.6 billion in 2021 to less than $5 billion in 2023 and are set to fail again in 2024. The company’s profitability has largely evaporated, with analysts forecasting a 93x forward P/E ratio based on projected 2024 earnings. So far, BioNTech has struggled to turn its vaccine profits into a more recurring revenue stream, which could lead to a sharp downside in its share price.
Merck (MRK)
Since November 28th, shares of Merck (NYSE:MRK) have soared 25%. That’s an incredible move for a pharma company with a market capitalization of $320 billion.
The company has a leading cancer drug, Keytruda, that analysts are getting increasingly excited about. If it lives up to expectations, it could be a blockbuster drug delivering billions of dollars annually in revenues.
However, we must ask how much value a successful ramp-up in Keytruda would be worth, given that Merck has added about $60 billion in market cap over the past two months. At this point, Keytruda’s success already seems baked into the price and then some.
To that point, Morningstar’s Damien Conover believes MRK stock is significantly overvalued. He assigns a fair value of just $103 per share compared to the current $126 stock price. In addition to the high valuation today, he sees rising competition in oncology as a considerable risk to Merck’s intermediate-term outlook.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.